Everything You Need To Know About Algorithmic Trading.
Posted by sgtmarkets from the Business category at 28 Mar 2019 08:51:53 am.
Trading, as we know, basically involves buying, selling or ownership of securities. Now, when we add the word 'algorithm' to trade, we introduce the use of algorithms into trading. The algorithm can be defined as a series of steps or rules that are followed to solve some problems.
So, today I’ll be writing about it. Here are the deets.
Algorithm trading or automated trading involves building and implementing trading strategies using the code and computer programming.
The trading strategy is basically a plan or set of rules that are defined to carry out the buying and selling process while trading to achieve certain results such as increasing profitability, better implementation, etc.
This trading strategy can be tested on historical data to evaluate their performance if traded according to parameters over a period of time.
This process is called Backtesting, which helps someone minimize losses and maximize profits according to their performance analysis on historical data.
What is the difference from Algorithmic Trading with manual trading?
Manual traders trade them by studying market conditions, analyzing signals and graphs and making appropriate trading logic. Moreover, in algorithmic or automated trading, one can position the trading logic inside the machine and let the machine analyze opportunities assigned on direct market circumstance and therefore take or recommend trade decisions whether to be long or short or hold positions.
A person can also automate the process of making trade decisions based on analysis that removes human emotions from the decision-making process so as to reduce the risk involved in making decisions based on emotions.
How do trade in Algorithms, Quantitative Trade, HFT, and Automatic Trading differ from each other?
Algorithmic Trading: The process of changing trading strategies into algorithms or computer codes and executing trades automatically or manually.
Quantitative Trading: Quantitative trading involves the use of mathematical calculations and sophisticated statistics along with quantitative analysis to develop trading strategies that can be executed manually or automatically.
Automatic trading: Automation of the entire order execution process such as buying, managing sales positions, etc.
Why Trade Algorithms?
Speed: Because of the use of computers and technology to implement trade, the speed of execution increases enormously which helps avoid slippage, which is the difference between the market price at the time the order is placed and the price at which the actual trade is executed.
Enhanced Accuracy: When the process is taken over by a machine, this reduces the human error caused by fatigue which can be caused when running a large number of orders manually.
Backtesting: One of the biggest advantages of using machines to trade is the fact that it makes things systematic, allowing the possibility to do a more comprehensive retest.
Discipline: Traders' emotions are eradicated in algorithmic trading because decision creating occurs in accordance with trading algorithms, fetching a higher level of discipline in trading.
Scalability: Algorithm trading provides the ability to monitor & analyze the number of shares & portfolios that are far greater than individuals who do it manually.
How do you start Trading Algorithm?
If someone is an absolute beginner with minimal knowledge about Trading Algorithms, then he must start by building the three skills needed. First, quantitative skills, which help build better trading models and strategies.
Second, trade skills to combine basic knowledge about financial market performance and what affects them. And, financial computing skills that help in coding trading strategies and understanding models through quantitative frameworks.
This combination of skills will enable one to successfully implement the Trading Algorithm strategy.
A person who does not have sufficient knowledge in this domain but wants to build a career in algorithmic trading or start algorithmic trading can begin to build his skills and begin to obtain the financial and technical knowledge needed to become an Algorithm Trader.
What will happen in the future for Algorithm Trading?
Algorithm trading has shown exponential growth in the past few decades and still continues to maintain an upward trend.
Technology plays a big role in taking over tasks that are done manually by automating them. Just as car manufacturing is transformed from a shop floor full of people to a new age shop floor that is fully managed & operated by robots, trading on financial markets has grown with the adoption of technology & rapid data analysis.
In advanced markets where algorithmic trade has been around for decades, algorithmic trading or automated trading has included more than 80% of the trading volume on leading exchanges.
The Indian market, which witnessed the algorithmic trade allowed by SEBI in 2008, today also saw rapid growth in the share of algorithmic trade with more than 40% of the volume of exchanges driven by algorithms.
Technology changes the way things are everywhere, making sure you have the power of the algorithm at your side!
So, was it helpful? And please tell me if you had any topic you want me to cover.