Algo-trading is the fastest evolving technology with incredible and intelligent functionalities that improve trading performance and speed for market participants. Today, financial institutions such as banks, broking houses and investment funds employ sophisticated algorithms to establish and liquidate positions at breakneck speed. This setup enables such institutions to exploit minor discrepancies in live market conditions, eclipsing what’s possible manually.
Algo-trading constantly monitors markets and places orders when conditions match a set of parameters such as volume, price, resistance, support, or any other factor that the trader or market participant is comfortable with. One of the advantages of algo-trading is that by using available data, it can easily and quickly identify an ongoing trend. It is otherwise a challenge for market participants to act fast by analysing a large pool of data in quick time. Besides, market participants can use multiple strategies at once and decide the net outcome of the strategy.
Let’s understand this with an example: if a market participant has applied 10 different strategies on a stock — here we are talking about one stock — the system will suggest variations. Out of these 10 strategies, if 7-8 show buy signals, the market participant will buy the stock. As the majority of the strategies are showing buy signals, it is natural to believe that the strategy will be favourable.
Algo trading uses technological and computational resources to make trade decisions, which can be a daunting task for novice traders to undertake with their limited knowledge of the financial markets. Undoubtedly, trading automation is an effective way to experiment with strategies and automate mundane processes for faster results. In addition, the advent of algorithms in financial services is expected to provide lucrative opportunities for growth in the foreseeable future. There is no questioning the fact that algorithmic trading will enjoy faster adoption — particularly now when platforms exist to truly make complex technologies simpler for all.
(DK Aggarwal is the CMD of SMC Investment and Advisors)
