Algorithmic trading or algo trading is a method in which a computer program or software automatically deals in the stock market. In this, some rules and conditions are fixed in advance. When such a situation arises in the market, the computer automatically buys or sells shares.
In simple words –
Initially you need to set the rules or some set of rules such as time price etc and once all buying and selling rules are set then after that the program or the platform will start taking trades for you, as per your logics even without making mistakes.
For example –
If you have decided that when the share of a company becomes Rs 500, then buy it and when it becomes Rs 510, then sell it. Now as soon as these rates come in the market, your computer will automatically deal.
How does algorithmic trading work?
- First you make a plan or rule.
- This rule is put into the software.
- Now the computer keeps an eye on the market all the time.
- Whenever an opportunity arises in the market according to your plan, the computer automatically makes the deal.
- In this, a human does not have to sit in front of the computer or mobile and press the button every time.
Benefits of Algorithmic Trading
1. Work is done quickly
A computer can make many deals in a second. It takes time for a human to think and press the button. A good opportunity is never missed in algo trading.
2. Emotions do not affect
Many times a human makes wrong decisions out of fear or greed. But in algo trading, the computer does only what you have already decided.
3. 24 hour watch on the market
Wherever you are, sleeping or roaming, your algo system always keeps an eye on the market. As soon as an opportunity arises, it automatically makes the deal.
4. Less chance of error
Humans sometimes make mistakes, but the computer does only what you have already taught it.
5. Check on old data
You can first check your plan on old market data. This will tell whether the plan is correct or not.
6. It save your time and full time efforts
Now you do not need to look every time at the trading view chart and deal every time. Once you make a plan, the computer will keep working on its own.
7. Record of every deal
In algo trading, there is a complete account of every deal. Later you can easily see your profit and loss.
Who is algorithmic trading for?
- Algo trading is beneficial for those people:
- Who cannot watch the market all the time.
- Who want to trade without fear and greed.
- Who want to earn according to their own rules.
- Who want to take full advantage of technology.
Nowadays there are many platforms where the facility of algo trading is available even without learning coding.
What precautions should be taken in algorithmic trading
- Always use a reliable platform.
- Check your plan thoroughly on old data first.
- Do not make any plan without thinking.
- Check your trade record daily.
- Take care of market fluctuations.
