Algorithmic Trading - The Future of Investing

Trading is one of the most favoured methods to secure finances and to earn more money across the globe. Though the risk factor is high, with the little study of the market situation, it becomes easy to overcome the risk. Earlier, the process of trading was manual. Buying, selling, even the calculation of risk, was done manually. From the late 90s, to overcome human errors and to reduce costs digital trading came into play. Hence called Automated Trading. Although the use of computers was restricted only up to perform actions as per the commands, it was not suitable for risk management. To manage the risk, algorithms (set of rules for problem-solving operation) were introduced in computer programming. Also, algorithms were used to buy/sell assets at the right time, price and quantity. The process is called Algorithmic Trading. It is the upgraded and more accurate version of Automated Trading. Industry reports suggest algorithmic trading market size is expected to grow from $11.1 billion to $18.8 billion, globally by 2024. [1]

Advantages of Algorithmic Trading:

1. Eliminates Human Error- Due to fatigue and stress, errors are commonplace leading to operational risk. Also, side-lining emotional aspects and focus on rational and unbiased trades is important for risk management. Introducing algorithms to automated systems eliminates the errors.

2. Accuracy- Shreds of evidence show algorithmic techniques are always more accurate than human decision making. Hence, more reliable.

3. Cuts Transaction costs- As systems don't require continuous monitoring, it needs fewer human resources. Eventually, results in decreased transaction cost and an increase in profit.

4. Back test- Back testing is the process of testing a developed strategy on previous stock market deals/situations. It gives validation to the strategy.

Applications of Algo Trading:

Many forms of trading and investment activities use algorithmic trading to get maximum benefits. Programmers have developed algorithm trading strategies. Following are the applications of Algo trading:

1. Long term trading- Investors who prefer large-volume investments or invest for a longer time, use algorithmic trading strategies to earn more yield. They use algorithm-based strategies to mark the arbitrary rise and low period in the market, to break the large volume of shares into smaller ones and release them into the market as per algorithm outputs. Also, they use algorithms to schedule their involvement in the market.

2. Short term trading- Intraday trading falls under the category of short-term investments. Investors buy and sell assets on the same day. The prime objective of Intraday trading is to earn profit by following and using market trends at the accurate time. Traders need to develop, use the appropriate strategies, Intraday trading strategies to earn benefits as the probability of risk is more. Bull flag trading strategy, Reversal trading strategy, Trend-based strategy, Pullback trading strategy are some effective Intraday trading strategies.

3. Systematic trading- Traders, who generally invest systematically, i.e. without taking a huge risk, follow the trends strictly, practices algorithmic trading. They find it much efficient than other techniques to calculate the risk.

Algorithmic trading serving all kind of traders by providing accuracy in outputs.

Requirements of Algo trading:

1. Knowledge of computer programming and algorithms to program for the developed strategy.

2. Trading facilities

3. Access to the market data to develop algorithms.

4. All the required provision for back testing.

Trader, investor, programmer, anyone who fulfils above requirements can go for Algo Trading.

There are multiple Intraday trading strategies are available but algorithms trading gives the most suitable strategy to implement. These strategies are first backtested and then should be executed.

Considering the above-mentioned benefits of usage of automated systems enriched with algorithms, the future of trading will be much more exciting and secure.

Ø No human intervention will be there, as the bots will be performing all the necessary operations. Chances of errors while predicting and or actual dealing will be very less.

Ø Using algorithms combined with AI, will give more accurate results.

Ø Algos can be programmed directly into the chips of bots for better communication.

Ø Using backtested archived data, multiple trading accounts and strategies will be managed effortlessly.

Ø The market crash will be the past as automated algorithm systems will be efficiently and more accurately predict future trends.

Many more exciting developments will be there in future as the bots will be taking charge.

References

1. https://finance.zacks.com/advantages-investing-stock-market-2054.html

2. https://www.investopedia.com/articles/active-trading/101014/basics-algorithmic-trading-concepts-and-examples.asp

3. https://cointelegraph.com/explained/algorithmic-trading-strategies-explained

4. https://blog.quantinsti.com/algorithmic-trading-strategies/

5. https://www.adigitalblogger.com/algo-trading/algo-trading-strategies/
https://kuants.in

6. https://www.algotrader.com
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