The allure of algorithmic trading has never been this high in the Indian stock market. The traders are gradually realizing the immense value of this concept and are gravitating to it. However, this concept is not a new invention but has been germinating in the U.S. and U.K. in the past few years. In India, it is slowly taking root and is poised to become a predominant trading strategy in the future. If you are interested in learning more about the concept or how to use an algo trading software, then you have come to the right place.
What Is Algorithmic Trading?
Algorithmic trading essentially utilizes a trading strategy that is inserted into a computer program in the form of a code. The code is created using Python or C++ and is able to automatically execute trades on behalf of the trader. This is quite a departure from the traditional proceedings where a trader manually studies the stock market and makes carefully thought-out trade decisions. This process makes the buying and selling of shares faster and more accurate.
These two lucrative factors have made algo trading a favorite among Indian traders. However, this strategy demands that the traders have prior programming knowledge in order to write the codes dictating the conditions of the trade. Therefore, the market penetration of algo trading in India stands at 50%, while globally, it reaches a high of 85%.
Step-By-Step Guide For Algorithmic Trading
As mentioned above, a trader starts by writing the code using either Java, Python, or NodeJS. They must design the program in such a way that it can automate almost every single step of the trading activity. However, in order to do this, a trader must put in some manual work. This is regarding:
- Getting hold of the stock’s historical price data.
- Manually compute the SMA of the stock.
- Locate the value of the last traded price of the stock.
This reduces the risk of investment as all decisions are backed by data. Furthermore, you can configure the program in the Algo trading app to sell a stock when it achieves a certain resistance level. The trading account linked within the app is self-sufficient and can execute a trade without you logging into the trading platforms.
Basic Principles Used In Algo Trading
It is already quite apparent how algo trading saves time and human effort. However, what attracts more traders to this strategy is the maximum level of accuracy that it affords them in a volatile market. This is so because the trading decisions are propounded on the following tenets of manual trading:
- Mathematical concepts of Probability, Calculus, and Regression inform the basic trading strategy.
- The strategy is backtested based on historical stock data, which helps gauge its viability.
- Risk management is another basic criterion in algorithmic trading. The algo trading software may be asked to automatically stop the trade if the market trend runs in the opposite direction.
Why Do Indian Traders Prefer Algo Trading?
The FinTech sector in India is undergoing a boom, and an individual with a respectable profile in algo trading may find themselves profiting from such a market condition. Private traders can set up a consultancy firm to help other investors manage their stock options using this strategy. More and more traders are transitioning to this trading strategy for the following reasons:
- Lacking Human Emotions
Machines lack the baser emotions that often lead traders into pitfalls. Many times, a trader makes a mistake because of greed or fear. Since the computer program obeys the coded instructions supplied to it, there are no chances of its decisions involving external factors. The code is designed based on the information gathered through quantitative calculations, which further removes the impediments imposed by emotions.
- High accuracy
Machines are always better suited to tackling the operational issues in the trading platform than any individual trader. For example, even an expert trader will consume up to 15 seconds before making a purchase decision on a particular stock. However, in that small span of time, the competitive edge is lost, and the price may change substantially. An algo trading app, on the other hand, can operate multiple orders simultaneously within that period of time.
- Scalable
The computer is able to concurrently scan through thousands of stock options and trading signals to make a logical decision. For an individual trader offering consultancy services, this is a huge advantage as he can manage and monitor many investment portfolios at the click of a button. Therefore, this method is scalable and more suited to the needs of the future.
What Is The Future Of Algorithmic Trading In India?
India has the potential to become the leader in the algo trading market. Exchange agencies such as BSE and NSE have realized this and sought to teach their member traders about the benefits of this strategy. Their involvement has stirred the traders to become more skilled in optimizing their approach to the data-driven market. Moreover, the SpeedBot Partner Program has opened up newer avenues in wealth generation and management.
Programmers in the FinTech sector are working to help traders bypass the steep learning curve involved in algo trading. They are doing this by means of APIs, which form the bridge of communication between two or more programs. Traders can easily use these APIs and get around writing the codes for the transaction. These APIs are also able to provide access to active market data and manage the trader’s portfolio in real time.
Conclusion
Algo trading still has a long way to go before it can capture the Indian market to the extent that it has done in the United States or Great Britain. However, developers of algo trading software are leading the charge in creating more user-friendly interfaces and accessible platforms for Indian traders. That being said, traders have also begun to test out their skills in the algo trading sector. This is a promising development and will help the strategy to grow its roots in the country.
