Algo trading, also referred to as “algorithmic trading,” is an automated version of buying and selling securities. To put it simply, algorithmic trading harnesses the power of computer programmes to execute trades based on a set of predefined inputs.
It’s like having a trustworthy black-box companion navigate the market based on the inputs given to it. Moreover, these inputs dictate the timing, price, and quantity, and mathematical models to execute a trade.
Owing to its accuracy, and timely response to the market, the popularity of Algo Trading is on the rise. However, knowing the basics is essential. Below is the algo trading guide for beginners. We will deep dive into how algo trading works and how one can utilize the same in trading.
How Does Algo Trading Work?
Algo trading has evolved trading with the use of tech making trading faster, easier, and free of human errors. Let’s learn algo trading better and understand that with an example.
Suppose a trader wishes to buy 50 shares of a company using the 50-day and 200-day moving averages:
- Such that, if a stock’s 50-day moving average crosses above its 200-day moving average, he buys 50 shares.
- On the flip side, when the stock’s 50-day moving average dips below the 200-day moving average, he sells those shares.
(A moving average is a stock indicator that analyzes data points for price fluctuations and spot trends.)
Now, here’s where the magic happens. With algorithmic trading, the trader can give computer-specific inputs. This computer programme diligently responds to the inputs in addition to the current market patterns, and moving average indicators, and automatically executes the buy and sell orders when the conditions entered are met.
The trader no longer requires tracking prices to place orders at a suitable time. The algorithmic trading system takes charge, flawlessly identifying trading opportunities, making overall trading easier and faster.
Source: Data Science Central
The Pros and Cons of Algo Trading
Given below are the three main advantages and drawbacks of algo trading.
Pros of Algo Trading
- Quicker Execution: Algorithmic trading offers the perk of instant order confirmation.
- Identifying Profitable Opportunities: By leveraging advanced algorithms, a trader can maximize his chances of getting the most favorable deals in the market.
- Reduce Human Effort and Errors: Algorithmic trading eliminates human efforts and errors as it operates based on predefined algorithms.
Cons of Algo Trading
- Chances of Errors: Algorithmic and fully automated trading may overlook factors that human traders consider during a Black Swan event.
- Not Cost-Effective: Creating an algo system can be expensive, making it a barrier for small traders.
- Regulatory Issues: Regulators aim to ensure fair practices and prevent market manipulation, which means the software should be aligned with the same.
Learn Algo Trading
Algo Trading doesn’t take each and every manual operation on automation. Instead, it is an approach which can reduce human efforts for conducting repetitive tasks and typical errors during live trading hours. The below factors are crucial to learning algo trading.
1. Know the Market
The first and the most important step to start algo trading is to learn about the market. Algo Trading works on the inputs that traders provide. As a result, algo trading may work with more precision if the market understanding is good.
For example, a trader needs to understand how the financial market functions in addition to how market volatility and particular instruments work. This helps feed in data for algo trading.
2. Learn the Required Skills
Complete reliance on algo strategy should be avoided. Algorithmic trading is a multi-disciplinary field that demands expertise in three essential domains.
- Financial Markets
- Quantitative Analysis
- Programming Skills
That’s alright if one doesn’t know how to code as there are many platforms that allow algo trading without having any coding skills.
3. Back Testing
A trader needs to test the algorithm before trading live in the market. Simply put, a trader should choose an algo strategy and back-test it to identify mistakes and areas of improvement. Later he can use this data to command the algorithm for automated trading.
Enroll in an Algo Trading Course
Like manual trading, understanding the fundamentals is a must in algo trading. This way one can make most automated trades. Algo trading guide for beginners can be learnt by enrolling in an algo trading course by Upsurge.club. With this course, they can learn about the basics of algo trading, algo trading strategies and much more as per their convenience.
With the automated setup, algo trading ensures traders can sit back, relax, and let the algorithm do the heavy lifting. It’s like having a trustworthy assistant who knows exactly when to jump on a promising trade based on pre-defined inputs. Upsurge.club provides comprehensive algo trading courses curated by experts, which can level up any beginner’s trading game.