Algorithmic trading is also called automated trading, black-box trading, or algo trading. It uses a computer program that follows a defined set of algorithms to place a trade. There are many software development companies that create software for algo trading in India. The trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader to do manually. The particular sets of instructions are based on timing, rate, quantity or shares, or any mathematical model.
Apart from profit opportunities for the trader, algo trading provides the market with more liquidity, and trading in a more systematic way by ruling out the impact of human emotions on trading activities.
An algorithm is a specific set of clearly defined instructions to carry out a task or process. There are instances when a human trader isn’t able to handle multiple numbers of trading, and that’s when you need the help of an intelligent algorithm. Custom software companies provide customized services for algo trading.
Algorithms have gained popularity in online trading platforms and many big clients demand it. In India software companies hire mobile app and web app developers to create Android and IOS applications for all trading. The algorithms help in analyzing every quote and trade in the stock market, identify liquidity opportunities, and help in making accurate trading decisions. Algorithmic trading, or computer-directed trading, cuts down transaction costs and allows the investor to make investment management decisions to take control of their trading processes. The algorithm continues to offer returns for firms with the scale to absorb the costs and get the benefit.
For Instance, if a trader plays 3 calls, When a stock’s 50-day moving average crosses its 200-day moving average and buys 50 shares of the company and when the stock’s 50-day moving average drops below the 200-day moving average the investor can sell any shares they possess.
To buy and sell any order the computer software automatically monitors the stock price in real-time and also the moving average and places the buy or sell orders when the criteria are satisfied using these two instructions. The trader does not need to manually enter any orders or keep an eye on changing pricing and graphs in the software. The Algo trading system keeps creating automatic trading and shows real-time activities.
Key Takeaways of Algorithmic Trading
Algorithmic trading combines computer programming and financial markets to execute trades at the right moment.
Algorithmic trading attempts to strip emotions out of trades ensures the most efficient execution of a trade, places orders instantaneously, and may lower trading costs. Common trading strategies include trend-following strategies, opportunities, and index fund rebalancing. Algorithmic trading is also carried forward based on trading volume (volume-weighted average price) or the passage of time (time-weighted average price).To work with algorithmic trading, you must have computer access, network access, financial market knowledge, and coding skills.
Algo trading software is created by a software development services company that provides services for web apps and mobile apps. The software company hires web developers for algo trading and customizes the software on mobile with the help of hiring mobile app developers for Android and IOS.
Top Advantages of Algo Trading Platform:
Algo-trading provides the following advantages:
- Execution: Trades are often carried out at the best possible prices.
- Low Latency: Trade order placement is instant and accurate (there is a high chance of execution at the desired levels). To avoid any price change the trader should timed the order correctly.
- Reduced transaction costs: Transactions decrease a there is no human involvement it is directly through one source which is a computer
- Simultaneous automated checks on multiple market conditions.
- No Chance of Human Error: Humans not involved at any point in trading create less risk of manual errors or mistakes when placing orders. No human touch means no emotional influence.
- Backtesting: Algo trading can be tested from behind the screen using available historical and real-time data to see if it is a viable trading strategy.
Top disadvantages of Algo Trading Platform:
There are also a few disadvantages of algorithmic trading to consider:
- Latency: Algorithmic trading depends on fast speed and low latency, which is late in the execution of a trade. If a trade is not carried out quickly enough, it may result in losses in trade.
- Black Swan Events: Algorithmic trading relies on historical data and mathematical models to predict future market movements. However, unforeseen market disruptions, known as black swan events, can occur, which can result in losses for algorithmic traders.
- Dependent on Technology: Trading through an Algorithm is completely done by technology where computer programs and high-speed internet connectivity are a must. The disadvantage of dependency on technology is if any technical issues or failures happen, it can disturb the trading process and it will lead to a loss in results. Technology and different skill sets are used by software developers for web and mobile apps for better results.
- Market Impact: Large algorithmic trades can have a remarkable impact on market prices, which can result in losses for traders who are not able to adjust their trades in response to these changes.
- Regulation: Algorithmic trading is subject to various regulatory requirements and oversight, which can be compound and time-consuming to comply with.
- High Capital Costs: As this is done virtually and it will need a good development and implementation of algo trading systems this will cost the trader in high amount the trader may need to pay for constant ongoing fees for programs and data in software. As the software development service companies hire developers for web and mobile applications the cost rises as skilled developers are hired and they charge high fees.
- Limited Customization: Algorithmic trading systems are based on pre-defined rules and instructions, which can limit the ability of traders to personalize their trades to specific needs or choices.
- Lack of Human Judgment: Algorithmic trading is based on previous mathematical models and historical data, which means that it does not take into account the subjective and qualitative factors that can influence market movements. Human judgment can be a disadvantage for traders who prefer a more intuitive or instinctive approach to trading because here the humans lack.
Highlight of Pros & Cons of Algo Trading
- On-the-spot order confirmation
- High chances for the best price and lowest trade cost
- No human error in trade transaction
- Not biased by human emotion and no involvement of human
- Lack of human judgment in real-time
- This can lead to increased volatility or market instability at times
- High capital outlays to build and maintain software & hardware and to constantly check for any glitches or broken connections or any technical issues.
Algorithms in Computer Science
A programmer must use five basic parts of an algorithm to create a successful program:
- Describing the problem in mathematical terms
- Formulas and processes help in creating results
- Keeping proper watch on the Input of the outcome parameters
- Run the program repeatedly and consciously to test its accuracy
The program goes through a set of parameters from which any conclusions of algorithmic results are shown.
The more complex the program it will get more data from the software which can be used to make accurate decisions to buy or sell securities. Coders test complex algorithms to make sure that the programs are running without errors.
Algo trading platform has created many jobs for algo trades and developers and the software created can be customized and used by the investors.
How to Start Algo Trading?
Algo trading can be started for any investor in the following pattern:
1. Overview and detailed knowledge of the market:
The first thing to do for any kind of trading is to understand the market. Before you dive into Algo trading, get an in-depth understanding of the market you can trade in by using a stock trading app. So that you can come up with a reason to base your trades on.
2. Knowledge and good practice of Code:
If you don’t know how to code, you can pick up some coding languages such as Python, and create an algorithm that works for you or get it coded by coders. Coding will help you throughout the trading experience as it will be handy for you.
3. Back-test Strategy:
Before going live with your algorithm, you must test your codes first. Get good quality of previous data from reputed sources and back-test your strategy. You can also use third-party back-testing software to confirm whether your algorithms work.
4. Choosing of Right Platform:
Codes are important for starting an algo trading so is the right broker. An individual should check thoroughly whether they have selected the right platform and right broker before starting a trade. Select a broker who supports your algorithm and provides various tools you can use to optimize your trading strategy.
5. Go Live:
Once you are confident with your algorithm, the next step is to take it live! Now monitor how it functions in the real world by keeping an eye on it. As the computer software runs through algorithms it doesn’t work in our favor at times.
6. Keep Evolving
Once you go live by chance the first strategy doesn’t work as desired so don’t lose hope on Algo trading keep Continuing to experiment with codes, and programs to see what works in our favor. Investors who do not have enough time or skillset to make their own algorithm do not fear because, in the Algo software market, there are many coders that you can hire and get the job done.
What are the Examples of Algo Trading
One of the renowned trading listed trading companies is Royal Dutch Shell (RDS) on the Amsterdam Stock Exchange (AEX) and London Stock Exchange (LSE). We start by building an algorithm to identify the buying and selling of securities, currency, or commodities in different markets or derivative forms to take advantage of different prices for the same asset and opportunities. On to observation: LSE trades in British pounds as AEX trades in euros. Due to the difference in an-hour time, Simultaneously, AEX is opened an hour earlier than LSE and it is followed by both exchanges trading for the next few hours and then trading only in LSE during the last hour as AEX closes before one hour of LSE.
We can see by another example, 30 lots of GBP/USD if the GBP/USD rises above 1.2012. Cover the short by 3 lots, for every rise of 5 pip in GBP/USD. A decrease in the price of every 5 pip in GBP/USD increases the short position by 1 lot. 200,000 shares from Apple (AAPL) are bought, if the price goes down by 200 then for every 0.1% increase in price above 200, buy 2,000 shares. For every 0.1% decrease in price below 200, sell 2,000 shares.
Average trading of algorithms is very popular in the market because it is very easy to use. If the algorithm buys a security (e.g., stocks, shares) and if its current market price is below its average market price over some period of time, and sells a security if its market price is more than its average market price over some period. Considering a 20-day moving average trading algorithm.
If the 20-day moving average price decreases then the Apple (AAPL) shares would be bought and if the price spikes the Apple (AAPL) shares can be sold through an algorithm. The red arrow shows the point in time when the algorithm would have sold shares and the same goes for the green arrow which would have shown when the algorithm would have bought the shares.
What are the Requirements of Algorithm Trading
An algorithm helps the computer program to read the market prices and understand the current condition.
- Price feeds from both AEX and LSE should be available.
- The rate of GBP-EUR should be seen in the forex (foreign exchange) rate.
- Capability of Order-placing should route the order to the correct exchange.
- The backtesting capability of the previous data and on price feeds.
- The computer program installed should perform the following:
- Reading the incoming price feed of RDS stock from both exchanges.
- Using correctly the available foreign exchange rates
- Converting the price of one currency to the other accurately.
- If there is a large discount on brokerage costs which helps in gaining a profitable opportunity then the program should place the order at the lowest price of exchange and sell the order at the highest price possible for the best gains.
- Taking advantage of different pricing and buying and selling at the best price possible will help in getting the best asset profit. The buying and selling of securities, currency, or commodities in different markets or derivative forms take advantage of differing prices for the same asset profit will follow.
- The practice of algorithmic trading is not that simple to maintain and use. If an investor can place an algo-generated trade, so can other market users. The prices fluctuate in milli and even microseconds.
- Price feeds from both LSE and AEX
- A forex rate feed for exchange rate
- Placing an order that can route the order to the correct exchange
- Back-testing capability on historical price feeds
As smart and thoughtful investors, we should understand risks and challenges. There will be always system failure risks or there will be a chance of network connection errors or the computer or system will make time lags between trade orders and execution due to technical glitches or any technical issues and most importantly of all, bad quality of algorithms. If anyone places an algo-generated trade, so can the other market users who will work in the same manner so there is always a chance of constant prices fluctuating and it fluctuates in milli and even microseconds. The more accurate and compound an algorithm is, the more good backtesting is needed before it is put into use.
Algorithmic trading makes large use of quantitative analysis. If an individual is investing in the stock market, they will need trading knowledge or past financial market experience so they will probably require knowledge of coding or programming because algo trading makes use of technology and software and computers. Algo trading makes High-frequency trading. There are few market investors who are not comfortable with algo trading and state it is biased in nature.
Algo trading development services in India have grown through time and have created good quality technology and hired web developers and Android app and IOS app developers specifically for getting the job done in an organized way. Customization in applications and the web is also done by custom web app development companies.