Algorithmic trading also known as algo-trading, uses a computer program which follows a defined set of instructions based on timing, price, quantity, or any mathematical model and, even on trading and investing strategies of an individual. It uses high-frequency trading technology, which helps traders to execute their buy or sell order at much faster rates.

Algo-trading has become significantly popular among institutional investors and large trading firms since the early 1980s for a variety of purposes. According to the research, algo-trading is beneficial for large order sizes of nearly about 10% of the overall trading volume.

Traders can optimize their strategies in the form of coding languages that a computer program can carry out. The speed of order execution, avoiding human emotions during trade, applying strategy to a broader range of stocks and tasks like bulk buying or selling can be done with the help of algorithmic trading.

 ● Is Algorithmic Trading Profitable?

Yes! Algorithmic trading is profitable if you get a couple of things right which includes proper backtesting, validation methods and appropriate risk management techniques.

Unfortunately, you may have heard that algo-trading does not work in the right way, because many traders have ended up losing money. As most of them have been using it with wrong methods like taking algorithmic trading in a confined one single trading style. But they don’t understand that it is more than that, it can work on multiple trading strategies ranging from a day to positional trading strategies at the same time. If combined correctly, it would benefit traders with better returns and less risk.

● Who can use it?

Traders who wanted to automate their trading on behalf of their strategies and who fully understand the rewards and risk involved in the use of algorithmic trading can use it. Generally, people who want to trade at faster rates of order execution by avoiding emotional decisions during trade prefer it. Even, experienced and professional traders and wealth managers use it for enhancing their trades more efficiently and effectively.

● Isalgo-trading allowed in India?

Algo-trading is not only legal in India, but it also accounts for nearly about 43% of the total trades executed on the National Stock Exchange (NSE). In the year 2008, the Securities and Exchange Board of India (SEBI) had allowed algo trading for the institutional investors. Since then, algo-trading has grown the number of trades executed on the Indian stock exchanges.

In the year 2012-13, SEBI has introduced the set of guidelines for using it in the securities market, which includes risk management measures and other checks for algo-trading. In 2016 August, SEBI proposed to strengthen the rules of algo-trading and to allow retail investors for using it, which determines a certain level of extent up to that retail investors would be allowed to use algo-trading.

● Should you use Algorithmic Trading?

The answer to this question depends on you if you are using algo-trading for backtesting your strategies and understanding more about the risk and reward that is associated with your strategies; it would be beneficial. If you are going to trade with algo-trading, make sure you must have the appropriate knowledge about how the program is going to respond in the market. Also, if it follows proper risk management techniques and other parameters during the trade that you have used in your coding is essential. If everything things seem right then, you can give a try to algorithmic trading.