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Benefits of Algorithmic Trading & How does it work?

What is Algorithmic Trading in the Indian Stock Market?

An algorithm is a particular set of clearly specified instructions intended to carry out a task or procedure. And there are instances when a human trader isn’t able to deal with vast numbers of trading, and that’s when you require the intervention of a creative algorithm.

Algorithms have attained popularity in the trading landscape and many big customers demand them. These mathematical algorithms assess every quote and trade in the stock market, specify liquidity opportunities, and turn the information into thoughtful trading decisions. Algorithmic trading, or computer-directed trading, cuts down transaction expenses and enables investment executives to take supervision of their trading procedures. Algorithm innovation continues to give returns for firms with the scale to absorb the expenses and to reap the advantages.

Algorithmic trading is the method of utilizing computers programmed to obey a defined set of instructions for positioning a trade to generate profits at a speed and frequency that is arduous for a human trader to accomplish. Any technique for algorithmic trading needs an identified opportunity, which is successful in terms of enhanced revenue or cost reduction. The algorithmic trading techniques follow defined sets of rules and are based on timing, price, quantity, or any mathematical prototype. Apart from revenue opportunities for the trader, algorithmic trading makes markets extra liquid and makes trading more standardized by ruling out emotional human influences on trading activities.

Algorithmic-trading has many benefits.

• Trades are implemented at the best possible rates.
• Instant and precise trade order placement
• Trades timed correctly and rapidly. This avoids substantial price changes
• Decreased transaction expenses due to lack of human intervention
• Simultaneous automated checks on numerous market situations
• Decreased risk of manual mistakes in placing the trades
• Reduced possibility of errors human traders based on emotional and psychological factors
• The greatest portion of present-day algorithmic trading is high-frequency trading (HFT). This trading strategy attempts to capitalize on placing a huge number of orders at very quick speeds, across multiple markets, and numerous decision parameters, based on pre-programmed instructions.

Algorithmic-trading can be applied in various forms of trading and investment actions :

• Mid to long-term investors or buy-side firms (pension funds, mutual funds, insurance companies) who buy stocks in huge quantities but do not need to impact prices with discrete, large-volume investments.
• Short-term traders and sell-side participants (market makers, speculators, and arbitrageurs) advantage from automated trade execution; in addition, algorithmic trading aids in building reasonable liquidity for sellers in the market.
• Systematic traders (trend followers, pairs traders, hedge funds, etc.) discover it much more fruitful to program their trading regulations and allow the program to trade automatically.
• Automated trading gives a more standardized strategy to active trading than methods based on a human trader's instinct or intuition.

Top 5 Advantages of Using Automated Algo Trading Software In 2021

1. Time Saver:

One of the greatest characteristics supporting the usage of automated algo systems is the time saver factor. Everyone is informed of the fact that there only a few forthcoming opportunities are ensuring the high-risk market. Observing the opportunities rapidly and taking fast decisions is the need of the hour as there will be an enormous crowd rushing up with their orders to the stock exchanges.

2. Optimistic Decision Making:

The favorable decision-making in manual trading is the most important drawback impacted by human sentiments. The computer system implements its functionalities based on algorithmic configurations without the peril of emotional interference. The automated trading system is assisted by configurations to track shifting market updates and essential trading data that the users can examine minutely. This enables them to stick to the investment plans curtailing their hesitancy.

3. Greater Order Entry Speed:

The automated trading systems enable rapid order generation once it locates the contentment of the essential trade standards. It can quickly identify changing market trends and assort measures as per algorithmic settings. The procedure of order entry is much rapid and enables automatic execution once the position is entered. This raises the chances of acknowledgment of the orders and the trading conduct.

4. Back testing Facility:

Back testing is the procedure enabling the application of the historical market data to the trading rules and techniques set on the algorithmic software. The assurance through backtesting ensures proper tryout of the trading decisions without any room for interpretation.

5. Preserve Trading Discipline:

In the highly volatile and risky market scenario, the decisions are frequently backed by various emotions like taking a defensive strategy due to the fear of losses or quick order placing in the quest for tremendous profits. Since all the moves are supported by in-depth market research excluding the emotional aspects, the process assures that the trading discipline is retained following the practical trading plan.

Conclusion:

The beginner traders can take some time into monitoring the different trading strategies on your automated trading software until you are fully positive that all the functionalities are carried on your system with optimal level accuracy. Some people with no prior experience with automated algo systems must come up with, their questions to their trading consultant to help save completely flexible and optimistic, with their moves in placing growing aging or selling shares, stocks, etc. All-in-all, these software systems help to conserve time, assorting adequate decisions, and analyze prospects in the evergreen market.