Algorithmic trading is an important aspect of day trading that most individual investors are unaware of. Algorithmic trading is the method used by major global banks and High Networth Individuals (HNI) for day trading. Having a very clear understanding of what you want out of the stock market is very very important. Algorithmic trading is now being used by millions of retail investors in developed markets across the World and is slowly becoming popular in India too.
Algorithmic trading is a trading system that utilizes advanced and complex mathematical models and formulas to make high-speed decisions and transactions in the financial markets. Basically an investor is using a software to trade in markets 24*7. He can set the rules for trading, buying and selling of stocks that are for offer on a bourse. What this means is you can have a certain strategy about investing in stocks on the basis of a strategy that you design – buy/ sell when the stock reaches a certain price. It also allows you to make quick financial analysis of stocks on the basis of the historical data available. This is useful in predicting the value of stocks not just for today, but for a few months to come.
One of the main benefits of Algo trading is that you can keep trading 24*7. It is practically impossible for us to be awake for 24 hours 7 days a week, but that is possible for the software. When one market closes, the software can shift its focus to another market in another time zone. This lets your money keep working for you 24*7. This is what most HNIs do. They ensure that they have someone looking over these investments in other time zones and this ensures that their money keeps multiplying always.
One needs to have a very good understanding of the industry or the stocks that he or she is investing in before they start using Algorithms. The reason is that the software operates much faster than an individual. One may search for information about it on the internet, but most blogs will confuse you more than enlighten you. The various trading strategies, agency Algo, etc. are concepts that need to be learnt from someone who has actually executed them. BSE Institute Ltd offers a 2 day course that allows participants to learn about every detail related to Algo trading.
Another advantage of Algo trading is that it does away with human emotions. A lot of times our emotions of greed and fear get in the way of sophisticated investing. While we may know that it may be good to invest in a stock, our fear may not let us take the right decision. The same may be applicable for the opposite. We may get too greedy and invest in a stock that may be cheap, but is not strong enough to grow. With a sound Algo trading strategy, the software follows exactly what you instruct it to. It cannot deviate from the fixed path and hence it helps your money stay a fixed profitable path. This again minimizes your losses from being emotional.
Algorithmic trading is usually used by High Frequency Traders (HFT), but now many Fintech companies are offering these services for retail investors. Some already manage over $8 Billion in funds. The main reason for most HNIs to shift to algo trading has been the freedom that it offers. It lets the software takeover and allows the investor to look at other investment opportunities. While this may be a fairly new function in India, it surely will be the most popular one as people hear about the success stories of different people. Those who are successful are always the ones who move fast and grab the first mover’s advantage. The question is whether you want to be the first mover or whether you want to read a story about a first mover?