What is Algorithmic Trading? Meaning, Benefits | Algo Trading Strategies

What is Algorithmic Trading?

What is Algorithmic Trading or Algo Trading

Do you know about Algorithm Trading? If no, then you don’t have to worry about because from this article on “what is algo trading?” I am going to give you a complete detailed information for the same.

Let’s directly jump into the topic and first we will start with the definition.

Learn about Algo Trading in Indian Stock Market

  • Algorithm Trading is a system of trading which facilitates the transaction decision making in the financial markets by using the advanced mathematical tools.
  • An algorithm is a specific set of defined instructions that is aimed to carry out for a task or process.
  • Algorithm have gained popularity in the trading landscape and many large clients demand it.
  • These mathematical algorithms analyses every quote and trade in the stock market, identify liquidity opportunities and turn the information into intelligent trading decisions.
  • Algorithmic Trading helps in lowering the transaction costs, allow investment managers to take control of their own trading processes.

Algorithm innovation continues to offer returns for firms with the scale to absorb the costs and to reap the benefits. In this type of a system, the need for a human trader’s intervention is minimized and thus the decision making is very quick.

This enables the system to take advantage of any profit making opportunities arising in the market much before a human trader can even spot them. As the large institutional investors deal in a large amount of shares, they are the ones who make a large use of algorithmic trading.

It is also popular by the terms of “Algo trading, black box trading, etc.” and is highly technology-driven with the use of computers programmed to follow a defined set of instructions for placing a trade to generate the profits at speed and frequency that is impossible for a human trader.

It has become increasingly popular over the last few years. You can work with any strategy of algorithm trading as it requires an identified opportunity which will be profitable in terms of improved earnings or cost reduction.

This trading follows defined set of rules, and are based on timing, price, quantity or any mathematical model. Despite of profit opportunities, algorithm trading offer the market to be more liquid and making the trading more systematic by not punching the trades with emotions and human impacts.

Now, let’s get into the benefits of Algo Trading.

Benefits of Algo Trading

  • With the help of this trading, the trades are executed at the best possible prices.
  • It reduces the transaction costs due to lack of human intervention.
  • It also gives the benefits of instant and accurate trade order placement.
  • The timing of trades are done correctly and instantly and it also avoids the significant price changes.
  • In this trading, the risk of manual errors in placing the trades also reduced.
  • In algorithm trading, the possibility of mistakes that are made by the human traders based on emotional and psychological factors are also reduced.

So, this was all about the benefits of the algorithm trading. This trading can be done by making an instructions in a computer program that can be written and by this it will automatically monitor the stock prices and place the buy and sell orders when the defines conditions are fulfilled.

In this, there is no requirement of manual intervention while placing the orders. Algorithm Trading can be applied in many forms of trading and investment activities:

  • Mid to long term investors
  • Short term traders and sell side participants
  • Systematic traders

Conclusion

From this article on “What is Algorithmic Trading” gives the brief idea about the definition, benefits and its application in the stock market.

With the help of automated trading, it provides a more systematic approach to active trading than the methods based on a human trader’s intuition or instinct.

With this,I just want to conclude with the topic that algo trading india make the human life easy and does not make any errors as it is completed programmed through the computers.

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