Algo Trading Explained: A Beginner's Guide To Automated Investing
Explore what algo trading means, how it works, and how it differs from traditional trading.
Are you a manual trader frustrated by slow decisions, missed opportunities, or emotional mistakes? Traditional trading often means spending hours analysing charts, yet still struggling to keep up with fast-moving markets. This is where algorithmic trading changes the game by using automated software to execute trades quickly, while also reducing human errors.
If you’ve ever wondered what is algo trading, how algo trading works, or whether it is profitable, this article will guide you through the basics, and explain key topics.
What Is Algo Trading?
Algo trading, also known as algorithmic trading or automated trading, uses computer programs and algorithms to automatically place buy or sell orders in the stock market. The software follows pre-set rules based on timing, price, quantity, or technical indicators. This removes manual intervention, speeding up decisions and reducing emotional mistakes.
How Does Algo Trading Work?
Understanding how algo trading works is crucial for beginners:
First, a trading strategy is designed using market indicators or rules.
This strategy is deployed in an algo trading software or platform.
The algorithm is back-tested on historical data to ensure profitability.
When the strategy conditions are met, the software places trades automatically.
The process continues until the strategy's criteria no longer apply or the market closes.
Notably, some of the algo trading softwares in India are QuantMan, Tradetron, and Algotest.
How Is Algo Trading Different From Traditional Trading?
Manual trading relies heavily on human judgment and timely execution, which may lead to slow trade placement, emotional decision-making, and limited ability to track multiple markets.
In contrast, algo trading is considered to be faster and more accurate. It involves emotion-free trading, ability to monitor and trade multiple securities simultaneously and capability to test and optimise algo trading strategies before live trading.
Is Algo Trading Profitable?
Profitability depends on the quality of your strategy and the market conditions. While algo trading reduces human errors and emotional biases, a poorly designed algorithm may still incur losses.
How to Learn Algo Trading in India?
Understand the basics of trading and technical analysis.
Learn programming languages commonly used in algo trading, like Python or R.
Explore user-friendly free algo trading software and platforms to practice. Join courses and webinars focused on algo trading in India.
Experiment with paper trading (simulated trading) before risking real money.
Many Indian brokers now offer built-in algo trading tools, allowing beginners to start with little technical knowledge
Challenges And Risks
Trading requires technical knowledge and software access.
Market conditions may change faster than your algorithm adapts.
High initial costs for premium software or infrastructure.
Risk of software glitches or bugs.
Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.
