A person planning to start a new business tries to figure out the critical factors that will contribute to its success. In other words, he focuses on the competitive advantages, if any, that he has over others. Similarly, for a person who wants to trade successfully in the stock markets, the key competitive advantages can be profitable trading strategies, good technology and infrastructure partner, quality research and risk management, among others. Algorithmic trading in India which was allowed by the Securities and Exchange Board of India (SEBI) in 2008, offers an opportunity to acquire the necessary edge, provided it is done in the right way.
Algo trading basically involves the use of a defined set of instructions to generate trading signals and place orders in an automated way. Ever since it was approved, algorithmic trading has grown rapidly and now contributes close to 50 per cent of the trading volumes of the exchanges. Today, instead of struggling to find opportunities by themselves while the markets race ahead rapidly, traders are automating their trading strategies to generate and execute a signal whenever an opportunity arises.
Develop Your Trading Skills
To become an algorithmic trader, you need three things: knowledge of financial markets, logical reasoning or set of rules to derive trading strategy, and Algo platform partner / broker.
In context of Knowledge of financial market, Algo trader may rely on their own strategies, which dependent on level of exposure to the market, understanding the way the markets work, and use of technical indicators like simple moving average (SMA), Bollinger bands, moving average convergence-divergence (MACD), and so on. Gradually, one can move on to acquire knowledge of advanced concepts which one can subsequently integrate into algo trading platform. Some level of proficiency in handling and interpreting data will go a long way towards making you a successful algo trader.
As discussed earlier, automated trading platform works in defined set of rules. One can formulate or define these rules or strategies using rich experience in financial markets, price observations, patterns identification or working on historical data of various financial assets.
Once you have explored a winning strategy, all that remains is to generate Buy/Sell signals in live market and get it integrated with Algo Trading Software you are using. Many traders think of coding as an optional skill since many brokerage houses provided algo trading platform and development services.
If all this sounds intimidating, do not worry as it is not hard to gain these skills. Both free and paid professional courses are available that can help you understand the stock markets and mentor you to develop your own unique algorithmic trading strategy.
If you are still apprehensive about becoming an algorithmic trader, there are stock market simulators available on the internet that let you practice your trading strategies in the live market. You can practice for a while to make sure your strategy works and then start live trading with greater confidence.
Finally, a lot of people harbor the misconception that one needs a lot of capital to begin algorithmic trading. This is not true. You can begin algo trading even with a modest sum. It is only if you are into high-frequency trading that you need a considerable amount of capital.
The rise of technology and data sciences is changing the way various industries work. In the years to come, they are going to play a big role in the financial markets as well. If you can master quantitative and algorithmic trading now, you will surf the coming wave easily, instead of being hit by changes that you are unable to fathom or deal with.
Programmed for Profits
- The advantage of algo trading is that as soon as the signal gets generated, the order gets executed. There is no time lag.
- If you are doing it manually, first you get the trigger / signal, then go to the brokerage account and enter the order, all of which takes time.
- Human emotions are not involved. Once, for instance, a stop loss is set, the algo executes it blindly.
- Retail investors may avoid booking the loss due to the phenomenon called loss aversion.
- If the system is well –tested with the draw down (level of loss you could make) calculated during back testing, you know how it is likely to perform.
- You can scale up your positions. If you make a profit in your previous trade, a percentage of it can be deployed in your next trade. Thus, even position sizing can be automated.
