The process of using computers programmed to follow a defined set of instructions for placing a trade in order to generate profits at a speed and frequency that is impractical for a human trader is known as algorithmic trading also known as algo trading.
An algorithmic trading strategy has to find a profitable opportunity that will increase revenues or decrease costs. The algorithmic trading techniques are based on timing, price, quantity, or any mathematical model, and they adhere to predetermined sets of rules.
In addition to providing the trader with possibilities for profit, algorithmic trading increases market liquidity and standardize trading by removing human emotions from the equation. Algo trading can be understood by an example given below-
Let us say a trader adheres to these straightforward transaction criteria:
· When Tata Steel 100-day moving average surpasses its 200-day moving average, buy 100 shares of Tata Steel.
· When the stock's 100-day moving average drops below the 200-day moving average, you should sell any remaining shares of Tata Steel.
A computer program can be created using two straightforward instructions that will automatically track the share price of Tata Steel (as well as the moving average indicators), place the buy, and sell orders when the predetermined criteria are satisfied.
There is no need for physical intervention in this case. The trader is no longer need to manually make orders or keep an eye on the graphs and live pricing. Each day, this algorithm completes his duties for him or her.
Strategies of Algo Trading – An Overview
Algorithm trading uses a variety of techniques based on which the algorithm's programmed instructions are created. The following are a few examples of algorithmic trading strategies as shown below in an image format.
The right technology and software infrastructure, as well as a human brain, are necessary for algorithmic trading to function. Algorithms must be well understood in order for them to function as programmed instructions. The finest source for creating such programmed instructions for algo trading with if-else and other clauses is human brains with programming abilities.