If you searched the Algorithmic Trading blog, it means that you deserve a seat in the community of well-informed people in the stock market. We completely understand that you are pondering over Algo Trading being worth or just another hype? Should you really be learning it to add it to your skills? Let’s take a deep dive through this article.
It is an automated trading system whose aim is to make your order placement easier and devoid of emotions. Nowadays, Algo Trading and API-driven trading are gaining immense popularity in the trading community. We also have witnessed a surge of requests for guidance and research from our students for the resources to learn and information about career prospects in it.
What is Algorithmic Trading?
Algorithmic Trading is executing orders using automated pre-programmed trading instructions. The variables which can used for automation include time, price, and volume, apart from strategies. To put it in layman terms, Algo trading uses computer programs to place buy and sell orders automatically, according to a user defined set of rules. These sequences or set of rules are called trading algorithms. This style of trading leverages the speed and resources of computers than relying upon human traders. Ultimately, it makes trading a little less time-consuming and entirely objective. It also puts all your emotions aside so your orders can be executed successfully without a shade of fear or greed.
Algorithmic Trading as a career option
Algo Trading might prove to be a very good career option. It is still in the nascent phase in India with its growth potential being exponential. In USA, algorithmic trading accounts for around 60-73% of the total equity trading. It is successfully dominating the traditional methods of trading. This trading style helps in increasing returns caused by time delay. It might seem to be a very lucrative system, it is noteworthy that automation applied to an inefficient operation magnifies the inefficiency. Therefore, to land on the profitable side, one should first learn the style before stepping into it. Only then one can decide if it works for them or not.
How to start with Algorithmic Trading?
Before we tell you how to start Algo trading, we’ll tell you the essential ingredients needed to cook up this storm.
- Python, Java, or any programming language
- Fetching financial data through an API
- Scraping web for additional data
- Storing the data in a database
- Manipulate and clean the data
- Good knowledge at time series analysis
- (Re)Learn statistics and machine learning mathematics
- Develop and analyze trading strategies
To kick start your Algo Trading, you can follow these basic steps: –
Step 1 – Develop/ Use a strategy and optimise it through rigorous back and forward testing. We totally understand that testing every strategy one might know is difficult, but this will build a very solid foundation for your system. A good strategy will lead you to consistent profits. Nowadays, there are many free and paid tools which could help you to ease this process. With huge technological advancement in this time, one can also stream historical data and deploy it to the broker.
Step 2 – The next step is to coding your thoroughly tested strategies. Python comes as one of the recommended languages used for coding. With its popularity, it is easier to seek help and carry out the corrections.
Step 3 – Apply your strategy using Algo trading broker platforms like Streak or Amibroker. You have to pay a nominal fee based on the subscription plan you choose but the paid amount will be inconsequential compared to gains over the years if implemented rightly.
Step 4 – Keep on practicing, testing and optimising different strategies using your experience and settle with a system of strategies which suit you the best. Eventually, your system will start to function smoothly and effortlessly.
We understand that there might be some doubts which are still lingering in the back of your mind. So, let’s clear them too!
Do I need to pay to get financial data from API?
Well, the answer to this question depends on the range and type of trades you take. If you are a newbie and just starting, you can utilise the financial data provided by brokers which can be used for testing. The data can also be retrieved from the NSE and BSE websites. However, as your experience grows you will be able to filter useful data efficiently and then you can think to go for paid API websites.
Is it important to learn to code?
It is advisable to learn into learning basic coding first. A single mistake in your code can prove to be catastrophic. Flaws in the code causes major headaches at the best and empty accounts at the worst. We can completely understand that learning to code takes time and hiring coders might seem expensive. Thus, until you get a grasp over coding, you can use software like Amibroker which convert strategies into code language for a nominal charge. Once you understand Algo trading suits you and its efficiency reflects in your profitability, a team with dedicated coder can be hired to code hefty API systems.
Do I just have to sit back and do nothing once I have developed and applied the strategy?
The answer is a big fat No. Algo trading does not mean that it is a money churning machine. You ought to be sitting in front of your system as an error might come without notice. In exceptional cases, you might have to take a decision to buy or sell even if your system fails to provide you with a signal. But you have to remember that such exceptional decisions should not be guided by your emotions. You will find the answer yourself once you start doing algo trades and experiencing such situations.
Is it important to look at such a long-time frame of 15-20 years?
It is advisable to look at such long periods so it covers minimum two to three bullish, bearish and consolidation periods of the market. This will make your system dependable and you can be less worried about your system failing in different market conditions.
Strategies in Algorithmic Trading
Strategies in Algo trading can be as simple as buying every time when a demand zone is crossed or as complex as you can make. It is very important to start with in Algo Trading. With your knowledge, experience and abilities your system will improve over time. To quote Warren Buffett, “Stay within your circle of competence and grow that circle over time.”
Advantages of Algorithmic Trading
- Time and cost-benefit – It is extremely difficult for a person to manage more than a couple of orders within few seconds. But with the help of Algorithmic trading, it is possible to execute thousands of orders within couple of seconds. With the time advantage, the trades are executed very near to desired prices. The frustration of missing key price levels is entirely eliminated.
- Based on objective criteria – Algorithmic Trading is a boon for those people who are victims of emotional trading and can’t figure out a way to overcome it. For them, Algorithmic trading is just the perfect tool as it eliminates the emotional and psychological factors along with biases.
- Multiple checks under different market trends – It continuously performs simultaneous automated checks on multiple market conditions which reduces the risk of failure of your strategies, shielding you from huge losses.
Just as each coin has two sides, Algorithmic Trading also has a few downsides apart from these upsides. One must have an idea about them before deciding to enter this kind of trading style.
Disadvantages of Algorithimc Trading
- Act according to the situation – How strong the system maybe, some situations might arise out of the blue. It is important that your strategy should work smoothly under both times- exceptions and normal circumstances. One should always be ready to optimise the strategy for removal of the flaw or better exception handling, preferably on the spot. The execution should be completely flawless. (Remember to take an informed decision which is not guided by your emotions)
- Imperfect Code – They prove to be extremely detrimental. Even a single misplaced quotation mark in the code has the potential to turn your profit-making strategy into a capital destroyer.
Is Algorithmic Trading for you?
Wait, Stop right there! Before you get into self-doubt, let us tell you that Algo trading is not rocket science. With the right resources, tools, and mindset, you can also become a successful algo trader. But you need to jot this down, that you have to abide by a system, use good strategies, implement them and then find what works for you the best. The skill is becoming a prerequisite in today’s world, where the number of transactions and participants are growing at such a rapid pace.
So, in a nutshell, Algorithmic Trading is WORTH it, if you have the need of it. Stay tuned, if you want to learn more in Algo with us…