The Algo Connect
In today's fast-moving world, technology is an indispensable accessory of everyday life, even for a trader.
A single entity can only concentrate on a limited number of stocks or parameters. It is practically not possible for a human to scan amongst a myriad of listed stocks for a potential trade. To give you an idea- there are over 5000 listed companies on the NSE & BSE. Over & above that, some members of the fraternity dip their beaks into commodity, currency & global markets at the same time!
Leave alone cryptocurrencies that trade round the clock.
Investors are faced with an even bigger dilemma in this aspect. It is impractical to go through annual reports, conference calls, press releases, etc of each and every listed stock.
Instead, investors & traders make use of certain indicators to identify their targets. For instance, a trader may long/short only those stocks that are above/below their 50 Day Moving Average (DMA). Similarly, an investor might shortlist only those companies that have reported year-on-year growth in revenues & profits.
A trader may code this algorithm on a computer software, say Python or R and link it to his trading account. This will automate the entire process & the system will forward all buy/sell orders to the exchange without any intervention or monitoring.
In essence, this is Algo Trading in its simplest form.
Technically speaking, Algo Trading is the automated buying & selling of securities using labyrinthine mathematical models & a defined set of instructions known as algorithms to carry out financial transactions at a breakneck speed. The instructions may contain specific variables such as price, time, volume, free float, etc.
The automation of trading processes allows investors to perform their strategies rapidly & more importantly free from human error, thus increasing the probability of profits. Moreover, Algorithm Trading systems do not get tired like manual traders. They work 24/7 to help one achieve the speed & accuracy that is impossible with human trading.
The domination of Algorithmic Trading is such that in developed markets such as the United States & United Kingdom, around 70-80% of the total trading volume is generated through Algorithmic Trading. In emerging market economies like India, the number stands at less than 50% but nonetheless is growing at a brisk pace. As per some recent studies, a whopping 92% of trades in the forex market are performed by trading algorithms.