Algorithmic Trading
Technology has changed the way of our work. The financial
markets are also not untouched by technology. At present, 30-50% of traders in
India are using Algorithmic Trading,
and 75% of traders globally. As we all know, Trading is the buying or selling
of securities in financial markets. Algorithmic Trading has introduced
mathematical algorithms into Trading and make Trading technological. Algo
Trading involves building and implementing trading strategies.
What is Algorithmic Trading?
Algorithmic Trading is the most advanced form of Trading and
highly technology-driven. It is the process of converting a trading strategy
into an algorithm using computer codes. Computers execute the trade based on
these algorithms. It has the advantage of speed and data processing over human
traders. The other term used for algorithmic Trading is Algo Trading.
Algo Trading works on the
pre-programmed automated instructions (an algorithm) for Trading. It is a
computer program - step-by-step instructions to complete a trading task to
achieve a particular outcome like increasing profitability, better execution,
etc.
Who can take advantage of Algo trading? Experienced and
professional traders, people who want to automate their trading strategies,
Technical analysts who wish to automate their Trading, Jobbers who want
auto-execution of trades, Wealth managers on behalf of their clients.
Automated Trading and algorithmic Trading are used
interchangeably mostly. But these two are different terms. Algo Trading is the process of
converting a trading strategy into a computer-based algorithm to execute the
trade. The strategy can be implemented in an automated mode. While Automated Trading is the complete automation
of the trading process.
The Automated
Trading algorithms are based on the markets and the objectives of the
trader. It facilitates quick profits in Trading in such a frequency that it is
impossible for a human being. The price quote changes multiple times within a
second. With the help of the algorithmic
Trading, trades take place within the fractions of the seconds without
human intervention.
How Does It Work?
It is a challenge to transform the trading strategy into an
algorithm using a computer program to execute Trading. Highly skilled
quantitative experts, researchers, and developers with a tech-focused approach
are required to develop algorithmic trading software and make it more
approachable. It must be easy to use. It is the final component of algorithmic
Trading.
The primary technical necessities for algorithmic Trading
are:
1. Computer-programming familiarity or Ready-To-Use trading
software to do your Trading:
Setting up an algorithm requires some technical knowledge. You
can buy algorithmic trading software or build it. You may have the technical
ability to program the trading strategy, or you can hire programmers, or use Ready-to-use
trading software. Take good care while choosing software for algo trading. You
can suffer hefty losses in financial markets with faulty software.
2. Access to trading platforms and network connectivity with
good strength:
You should have access to prominent trading platforms and
reliable network connectivity to execute trades. Trading platforms should be
famous, which provides live streaming quotes, research calls, integrated fund
transfer systems, etc.
3. Access to market data feeds:
The algorithm monitors the market data feeds in search of opportunities
to execute trades. Market data feeds allow traders to know the latest price for
financial instruments.
4. Infrastructure to backtest the algorithmic system:
You have built the algorithm as per your trading strategy.
Now you need to backtest it before making it live on real markets. You should
have the infrastructure and ability to check the efficiency of the system.
5. Historical data for backtesting:
The availability of historical data depends on the intricacy
of the algorithm, i.e. the rules and instructions implemented in the program.
Algo trading involves the formation of predefined algorithms
(set of instruction) based on Algo Trading strategies so that the
computers can execute the trade on its own, based on strategy. These smart
algorithms are a bundle of backtested trading strategies. Backtested strategies
are tested and evaluated on historical data. It helps to maximise profits.
The Core
The algorithms are designed that can be compatible with the
strategy chosen by the trader. The traders can choose different strategy at a
different point in time depending upon the market conditions and other factors.
Strategies are essential in determining the efficiency and
profits that can be obtained from algo trading. Although the algorithm is
placing the orders, it is the trader who develops the strategies to define how
the Trading will occur. The traders decide what they want the computer to do,
at what volume, at what price, at what time.
Comments
Post a Comment