In today’s era, people adopt many ways to invest money in the stock market. Some buy and sell shares themselves, while others trade by taking advice from an expert. But now technology has advanced so much that deals can be done automatically by computer or software without spending time in the market yourself. This method is called – Algo Trading.
The full name of Algo Trading is Algorithmic Trading. In this, the computer program or software makes deals in the stock market for you. This software is given a plan or rule (Strategy) in advance. According to that rule, the computer makes deals in the market.
For example –
If you set your system to buy a stock when its price goes above Rs 100 and sell it when it reaches Rs 110. So as soon as this opportunity comes in the market, your computer will make the deal without delay. You neither have to press the button, nor pick up the mobile nor do you need to look at the chart.
How does Algo Trading work?
To do algo trading, first you have to make a trading strategy i.e. a plan for the deal. This plan depends on the type of trading you want to do.
Suppose you want to earn a profit of Rs 5-5 a day. So you can make such a plan that as soon as a stock is available at Rs 200, the computer buys it and as soon as it reaches Rs 205, sell it.
This strategy is put into the software. Now whenever this situation arises in the market, the computer will automatically make the deal.
Some people make their own rules and some people use ready made strategies. Nowadays there are many such websites and mobile apps, where the facility of algo trading is available without knowing coding.
Benefits of Algo Trading
Now let’s talk about the benefits of doing algo trading. When a person trades, many times he takes wrong decisions due to fear, greed and emotions. Algo trading is a completely different and safe way from all these things. Some of its major advantages are given below:
1. Work is done faster
Computer works many times faster than humans. It can make thousands of deals in a second. Whenever a good opportunity comes in the market, the algo system immediately makes the deal. It takes time for a human to work so fast and sometimes a good opportunity is missed.
2. No effect of emotions
When a human trades himself, sometimes he gets scared, sometimes he gets greedy. This also leads to wrong decisions. But in algo trading, the computer only works according to the plan made by you. It neither gets scared, nor greedy. This does not lead to wrong decisions and does not miss the opportunity to make profits.
3. 24 hour monitoring
Suppose you are busy in some work or are resting, even then your algo system keeps an eye on the market all the time. Whenever an opportunity arises according to the set rules, it automatically makes the deal. With this, you do not need to sit in front of mobile or laptop all the time.
4. Less chance of error
Humans can sometimes make mistakes. But the computer will do only what you have already set. This lower the chance of making wrong decision or mistake in the market.
5. Test on old data
The biggest feature of algo trading is that you can first test your plan on old market data. This is called back testing. This means how you have performed in the stock market earlier. If the result is not good then you can also improve the plan.
6️. Saving time and effort
If you trade yourself, then you have to keep an eye on the market all the time. You have to see the chart, read the news and make deals. But this is not the case in algo trading. Once you make a plan and put it in the system, then the computer will keep making deals on its own. This saves both your time and effort.
7. Record of every deal
In algo trading, the complete account of every deal remains in the system. You can see your deals whenever you want. With this, you can correctly analyze your profit and loss and make a better plan for the next time.
Who is algo trading for?
Algo trading is for every person who wants to earn money in the stock market with his mind, but cannot take time to watch the market all the time.
- It is also beneficial for those who make wrong deals due to their emotions.
- Apart from this, algo trading is a great option for those who want to use technology properly.
- Nowadays there are many platforms where the facility of algo trading is available even without knowing coding. You can use ready made strategies or even make your own plan.
Precautions of algo trading
Where there are benefits, some precautions are also necessary. While doing algo trading, you should keep these things in mind:
- Use the right platform and reliable software.- There are so many online trading platforms available in India.
- Backtest your strategy thoroughly first.- This will give you clear clarification for your strategy.
- Keep in mind the big fluctuations of the market.- Any big movement can come any time so you need to save your capital.
- Keep checking your trade record daily.- Always check your net positions and PnL.
- Never make deals without a plan.
