The stock market is catching theeye of most of the people. The reason being the returns that can be made out of it. Stock market is definitely a risky business but it can be very rewarding. There are two types of investors in the market. The first one is along-term investor, who invests in the markets for alonger horizon. On the other hand, another type of investor is atrader, who indulges in intraday or short-term transactions.
Trading in the stock markets is not everyone’s cup of tea. It requires not only continuous monitoring of stocks but also the ability to take right positions. One wrong position can lead to anintraday loss. Therefore, utmost care needs to be taken by a trader. Every trader can opt for a unique trading strategy depending on his risk appetite. One of the popular trading mechanisms is algo trading.
Let us understand the meaning of algo trading.
Meaning of Algo Trading
Algo trading or algorithm trading is a mechanism in which trading of shares in done using computer software that uses advanced mathematical tools. Algorithm trading is done with the use of computer programs that follows a defined set of pattern to place the trade orders. This trading mechanism is used to trade at ahigh frequency that is beyond human’s capability. It is useful to generate higher profits at a rapid pace.
Let us take an example to understand the algo trading mechanism in a better way.
Example of Algo Trading
Suppose the algo trading software gives a command in the following manner:
- Buy 100 shares of a company if the 100-day moving average of the stock crosses the 200-day moving average.
- Sell the stocks of the company when its 50-day moving average falls below its 200-day moving average.
From the above, we can see that the computer program shall follow the given instructions. The computer shall executethe orders automatically when it spots the shares price in the levels suggested above. Here the trader needs to do nothing, all the orders shall be processed by the algorithm trading system automatically.
Since the orders in algo trading system are processed without any human intervention, there are few advantages and disadvantages associated with it. Let us have a look at few of the benefits and risks of algo trading system.
Benefits of Algo Trading
As we all know that computers can perform more tasks than humans can at a single time. This applies to algo trading as well. In algo trading system, many transactions are executed at the same time when the condition given to the program is triggered. The algo software can successfully detect stocks which fall under the defined condition. It is not possible for ahuman to do that. Apart from this, human errors while placing an order are completely eliminated. The algo trading system follows important trends in the markets like historical data, price levels, volumes, and other technical indicators which is further helpful for a trader.
Even though there are many benefits associated with algo trading system, there are still few risks.
Risks in Algo Trading
There are only three risks in algo trading. They are human error, power failure and network error. Human error can be in the form of wrong programming in the algosoftware. This can lead to theexecution of wrong transactions. However, same could be overcome with the help of accurate programming. Another risk is power failure and network failure. These risks are attached to any type of trade, one does on the computer.
To conclude, it would not be wrong to say that despite the few risks, learning and transacting through algo trading platform is very profitable for the trader.
Indira Securities is one of the leading financial service providers. Our wide ranges of premium services make us stand apart from our competitors. Our in-house professionals and experts give stock recommendations to the clients based on algo trading system. The stock advice is also based on technical and fundamental analysis of the stocks. Our clients can use our services inthe mobile application as well. The application has asmooth interface and is easy to use. Open a demat account with us and enjoy our premium services. If you have any query or want to avail any information, you can reach us via email or phone.