Algorithmic trading also known as algo trading was largely utilized by the institutional investors, but now numerous broking houses have come up with the algo trading features in order to cater the retail and individual investors. Algorithmic trading is nothing more than trading based on the rules that are precisely defined. It encircles a broad spectrum right from simple rule-based systems trading a single market to highly mathematical models simultaneously trading thousands of securities based on their interrelationships. Let us now dive deep into the advantages of algo trading:
What makes Algo Trading Different?
It basically involves the usage of computers to follow a set of pre-defined instructions for placing an order or trade to generate profit. Human intervention in algo trading is minimal and the system identifies on its own, any such profit-making opportunities erupting in the market even before the human trader can discover the same. It is largely used by institutional investors who deal in very large number of shares. This is why it has become increasingly popular in the last few years and is enticing many retail investors who invest in the stock markets.
Mechanics behind the Algo Trading
Let us suppose, being an investor you have two simple ways of buying and selling:
• Buy 100 shares of XYZ Company when its 50 per day dynamic average exceeds 100 per day dynamic average.
• Sell shares of ABC Company when its 50 per day moving average goes below the 100 per day moving average.
So keeping the above two aspects in mind, a computer program can be made that automatically tracks the share price including the dynamic average indicators and place the buy and sell orders whenever the rules are met. In the whole above process, there is no need of an investor to monitor the live prices or the graphs. Hence, the algorithms perform the work of an investor more efficiently.
A Motivation for Algo Trading
Individual investors can use algorithmic trading as it will help in multiplying his/her profitable trade. If a specific trading has pan out to be profitable for you, why not increase the number of profitable trades so as to earn more?
There are profits and losses happening simultaneously in trading, but in order to earn more you profit must compensate enough for your loss such that it accounts for your efforts and costs. This is where Algorithmic Trading stands out from the crowd.
Any trading strategy whether it is algo trading or the high frequency trading, each come with their own merits and demerits. If as an investor you want to become a trader, you need to use them pretty wisely.