Here is how to approach market in a disciplined, data-driven manner through algo trading

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© Sunil Matkar Here is how to approach market in a disciplined, data-driven manner through algo trading

If you have chosen to start your journey with algorithmic trading, you have made a great decision. Algorithmic trading allows one to make decisions in a rules-based, objective manner, devoid of human emotions.

Before we get into the nitty-gritty on how to get started with algorithmic trading, let’s first cover what it is, and what it isn’t.

What is algorithmic trading?

Algorithmic trading is the usage of predefined algorithms to dictate the exact criteria for buying and selling stocks (and other asset classes listed on stock exchanges, including F&O, commodities, currency derivatives, etc).

The benefit of algorithmic trading is that once the software has been built and starts running, all decisions are taken automatically. As a result, users can not only take trades in a more precise manner but also save time they would spend on a trading terminal.

In India, algorithmic trading is responsible for more than 50 percent of all traded volumes in the cash and derivatives segments, largely driven by institutional players but also steadily picking up at the retail level.

While the term “algo trading” has turned into a buzzword, a word of caution: algo trading is not a surefire way to make profits instead it allows one to approach the market in a more disciplined and data-driven manner.

Types of strategies

The most critical element for algorithmic trading is to have a trading system thar can be programmed.

A trading system can revolve around just about any idea. Popular categories of strategies include:

a. Day trading: you are looking to buy and sell within the same day

b. Swing trading: you are looking to take advantage of longer-term movements in price (days/weeks)

c. News trading: you wish to buy or sell volatile securities around important news events like earnings

d. Scalping: involves capturing extremely short-term market inefficiencies in a mostly risk-free manner (difficult to do at the retail level)

Getting started

A trader can simply open a brokerage account with an API-enabled broker (a quick Google search will fetch you the results). Simply fund your brokerage account, activate API trading, and build your trading application using the broker’s documentation. Of course, you will need to have programming experience if you’re looking to build the application yourself,  otherwise see if you can find a freelance programmer who can take your trading idea and convert it into executable code.

Unlimited possibilities

A word of caution: Once you go algo, you may never go back to discretionary trading. With algorithmic trading, you can powerfully incorporate stop losses and other risk management controls. A good idea is to backtest your strategy on high-quality historical data (which can be obtained through your broker) to see how it performed in the past. Strategies which have consistently delivered healthy risk-adjusted returns over a long period of time can be expected to do so in the future as well.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.