Introduction to Algorithmic Trading
An overview of automated, rule-based trading systems.
For Advanced Users Only
Algorithmic trading is complex, involves significant risk, and requires technical knowledge. This guide is a high-level educational overview and not a recommendation to start trading. Losses can be rapid and substantial. This is not suitable for beginners.
What is Algorithmic Trading?
Algorithmic trading (also known as algo trading or automated trading) is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. It uses computer programs to follow a defined set of instructions for placing a trade in order to generate profits at a speed and frequency that is impossible for a human trader.
The rules built into the algorithm can be based on timing, price, quantity, or any mathematical model. Apart from profit opportunities for the trader, algo-trading renders markets more liquid and more systematic by ruling out the impact of human emotions on trading activities.
How Does It Work?
Strategy Development
A trader or quantitative analyst defines a trading strategy based on a set of rules. For example: "Buy 100 shares of a stock when its 50-day moving average crosses above the 200-day moving average."
Coding the Algorithm
This strategy is then translated into a computer program. Languages like Python are very popular for this due to their extensive financial libraries.
Backtesting
The algorithm is tested on historical market data to see how it would have performed in the past. This crucial step helps in refining the strategy and understanding its potential profitability and risk.
Execution
Once the strategy is validated, the algorithm is connected to a stockbroker's API and deployed on a live market. The program then monitors market data in real-time and automatically executes trades when the predefined conditions are met.
Common Algo Trading Platforms in India
You don't always need to code from scratch.
Zerodha Streak
A popular platform that allows users to create, backtest, and deploy trading strategies without any coding. It works with the Zerodha Kite trading platform.
Tradetron
A marketplace for trading algorithms where users can subscribe to strategies created by others or build their own using a visual, block-based strategy builder.
Broker APIs
For advanced users, most major brokers (like Zerodha, Angel One, Upstox) provide APIs that allow you to connect your custom-coded programs directly to their trading systems for execution.