What Is Algo Trading? A Complete Beginner’s Guide

Algo Trading (Algorithmic Trading) is a Trading method that is executed by the use of Computer Software Programs based on specific predefined Rules.

The Trading Rules created by Algo Traders are based on a combination of the following factors:

• Price
• Time
• Trading Volume
• Market Conditions
• Technical Indicators

Algo Trading does not provide the opportunity for a manual trader to make decisions. Algorithms Detect market conditions, identify trading opportunities and automatically execute trades in milliseconds – significantly faster than any human trader can. 

Simply defined: 

•  Algo Trading = Automated Data Driven Trading that is Done Fast.

How Automated Trading Works

Automated trading uses a predefined set of rules that a trader/programmer has created to perform trades on behalf of traders.

Examples of these rules include: 

• Buying when RSI drops below 30
• Selling at a specific price target
• Entering trades only within a set timeframe of 9:20 am – 3:00 pm
• Exiting a trade if the position goes against the trader by 1%.
• When conditions are met, trades are automatically executed.

There are no emotions, no delays, and no manual errors involved in automated trading.

Why Automated Trading Has Grown In Popularity

1.Execution Speed & Efficiency

Automated trading systems execute trades in real time, thus allowing no missed trading opportunities.

2.No Emotional Involvement

Automated trading systems remove the influence of fear, greed, and panic (which are often found in manually executed trades) from the decision-making process.

3.Strategies Back-Testing

Automated trading systems allow you to back-test your trading strategies against past (historical) market data before placing any actual capital at risk.

4.Excellent For Large Volumes

Institutions, hedge funds, and professional traders utilize automated trading systems to execute their large-volume trades.

5.Great Time-saver

Once established, the automated trading system monitors the markets and places trades on your behalf.

The Most Commonly Used Automated Trading Strategies

1.Trend Following Algorithms

Trade only in the same direction as the underlying markets are trending (buyers participate when the market goes up and sellers only when the market goes down), typically created using moving averages (number of periods), breakout levels (the market is nearing support or resistance), and/or momentum indicators.

2.Arbitrage Algorithms

Seek to exploit the price disparity between two or more markets for the same security or stock.

3.Scalping Algorithms

Make rapid, positive returns from trading positions by placing trades for very small price movements within very short time periods (seconds).

4.Mean Reversion Strategies

Traders assume that the price action eventually returns to an average price level. 

Is The Legal Status Of Algo Trading In India?

Yes, Algo trading is allowed in India under the Regulation of SEBI and has been expressly approved and regulated by SEBI. 

Therefore, algorithm trading can only be performed with brokers that have developed a platform giving brokers/retail traders API access, for example, Zerodha, Angel One, Dhan, etc.

Who Can You Use Algo Trading For?

Algo trading can be used for the following types of traders:

•  Those wishing to automate their trading
•  Those who work and do not have time to track the markets
•  Who trade intraday or scalp stocks
•  Traders who trade based on data only
•  Those who like to Trade like a machine

The Leading Algo Trading Software Providers in India

The most frequent providers of algo trading are:

•  Zerodha Streak
•  TradingView (webhook)
•  Custom Python Algorithms
•  AlgoTest
•  Tradetron
•  Amibroker

Pros of Algo Trading

• Faster Execution
• 24/7 Strategy Monitoring
• No emotional issue
• More reliable and consistent
• Ability to take advantage of more advanced strategies

Cons of Algo Trading

While algo trading can provide traders with many benefits to help them develop profitable trading systems, it does have limitations:

•  Requires some level of technical knowledge
•  Risk with poorly designed strategy
•  Requires stable internet connection and brokers with APIs
•  Therefore, the need for proper training

How To Learn Algo Trading Right

At NXT Institutions, we offer courses and training programs to teach beginners and traders:

•  Market Data
•  Trading APIs
•  Basics of Coding
•  How To Build Strategies
•  Various Methods Of Backtesting
•  Real-time Automation

For these reasons, students know us to be the Best Trading Institute in Malappuram and The Best Forex And Trading School.