Algo Trading |
November 13How to Identify Algorithmic Trading Strategies ?
The
most basic rule of stock trading is Strategies, which allow you to trade in the
right manner with the aim of good return in the end. One wrong investment and you
will end up losing your hard-earned money. However, like other industries,
stock trading is also witnessing a substantial change. Algorithmic Trading is
one such significant change taking over the stock trading. Algo trading platform in India is not new. However, not every
trader is aware of this concept. Even in Algo Trading, the trader has to follow
specific strategies that can bring in good return and help to track the stocks
easily.
But, before getting into the Algorithm-trading
platform strategies, let us first understand the basics of the Algo-platform:
Algo
Trading is an advanced form of trading in the modern world. It is the system
using which stock trading is conducted through computers set up with predefined
set of instructions, called Algorithm. One of the key benefits of Algo trading
is a faster trade execution compared to manual trading. Under this trading, the
execution of trade performed at the price and volume specified, along with the
time taken for the trade process. Trading with Algorithm trading platform
requires defined set of rules, discipline, and, more importantly, patience.
The
market of Algo trading in India
is increasing rapidly. The market size is not just growing in India, but also
globally. According to the market research report by Markets and Markets, the
global market size of Algorithm Trading is set to increase from USD 11.1
billion in 2019 to USD 18.8 billion by 2024, at a Compound Annual Growth Rate
(CAGR) of 11.1 percent.
In
India, according to the NSE data in 2018, the Algo trading across cash and
derivatives increased up to 49.8% in last eight years from 9.26%.
One
of the major factors fuelling this growth is fast and reliable stock trading.
Furthermore, the introduction of concepts like AI & ML in finance sector
adding value to the Algorithm trading.
Benefits
of Algo Trading-
If
you haven''t started Algorithmic trading or new to this process, then here are
few benefits of Algo trading you
must know-
One
of the benefits of using Algo trading is the accuracy you get. Since computer
systems automatically execute the trade, you can avoid pitfalls or human errors
by investing in the wrong stock. In the manual entry, there are high chances to
buy the wrong currency pair, compared to the computer Algorithm, where every
share crosschecked.
Another
best benefit of Algo trading is there is no human emotion involved. Traders
here rare constrained within a set of predefined criteria. In many cases, human
trading is susceptible to emotions leading to wrong decisions. These emotions
eventually will lead to the wrong stock investment.
- Reduction in Transaction Cost-
In
Algo trading, there is a reduction in transactional cost. Here, traders do not
have to spend much time over monitoring markets, as the execution of trades
done without supervision. This method certainly brings down the cost of
transactions.
Strategies
for successful Algo Trading-
Having
a programming skill is one of the crucial factors to consider when creating
strategies for Algorithmic trading strategy. This strategy will help you to get
aware of all aspects of the trading setup. No worries, even if one is not aware
of programming at all, as there are brokers who provide complete technology
services to set up Algo platform for clients.
- Momentum-Based Strategies-
Assume
there is a specific trend in the stock trading, and as Algo trader, you will
follow that particular trend. However, the market falls within the week. Here,
you can use statistics if the trend will continue or change midway. In case of
changes, you can make a move accordingly. This method is called a
Momentum-based strategy, which seeks profit from the existing trend by taking
the market change. In simple words, buy high and sell higher and vice versa.
There are different ways of momentum trading strategies-
Earnings
Momentum Strategies-
In this, the profit may come from the
under-reaction to short-term earnings.
Price
Momentum Strategies-
In this strategy, you may profit from the market''s
slow response to broader set of information.
Arbitrage
is one of the Algo trading strategies using computers, helping to identify mispriced
opportunities, and making the best use of it. There are many Arbitrage trading
strategies like Cash Future, Future to Future, Put Call Parity etc.
Under
this, when the arbitrage opportunity arises due to price misquote, it will be
beneficial to the Algorithmic trading strategy. However, this opportunity can
last for a short duration because the market is adjusted quickly.
The
best example here is, if Reliance Spot is trading at 1480 and Reliance Future
is trading at 1500, this creates cash future arbitrage opportunity, resulting
in gains of 1.01% if hold till contract maturity.
Mean
reversion strategy is yet another effective Algo trading strategy with the
thought that prices of security may go high or low. However, prices do come
back on the mean value at some point of time. This strategy is called the
Counter- Trend or Reversal Strategy. In this strategy, the Algorithm works to
execute orders when the price goes beyond the normal range. The algorithm
calculates the average price range based on historical data of the security and
executes the trade with the expectation of price comes back in the regular
line.
The
best example for this is- When 30-days moving, an average of the security is
lower than 90-days moving average. Here, you can assume that the price is low
and expected to return to the 90-days moving average price.
- Options Trading and Options Trading
Strategies-
If
you are expecting a quick result on your stock trading with limited
investments, then it is options trading. One of the benefits of following this
strategy is you can create your own custom Options Trading Strategies, test
them, and practice it during small stock trading.
- Weighted Average Price Strategy-
This
strategy can be either on volume-weighted average price or on time-weighted
average price. In this strategy, orders are released in parts with the use of historical
volume profiles of the stock between the start and end time. Computers and
algorithms play a significant role in this strategy and releasing orders in
smaller parts.
Bottom
Line-
Whether
you are new in trading or an established trader, it is vital to use the best Algorithmic trading platform available
in the market. Run by professionals; you can use the best platform for stock
trading and getting a promising return for the long term.