How 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.
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.
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.
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.
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.
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.
Originally published at https://www.myfindoc.com.