{"id":9625,"date":"2022-09-03T18:03:39","date_gmt":"2022-09-03T12:33:39","guid":{"rendered":"https:\/\/aayushbhaskar.com\/?p=9625"},"modified":"2022-09-05T12:28:13","modified_gmt":"2022-09-05T06:58:13","slug":"understanding-algo-trading-in-india","status":"publish","type":"post","link":"https:\/\/aayushbhaskar.com\/understanding-algo-trading-in-india\/","title":{"rendered":"Understanding Algo Trading in India","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"

With the development of modern technology, practically every company is now relying on logical code to determine how effective trading is. For accomplishing the desired results, algorithms employ user data, historical data, and a predetermined set of instructions.<\/span><\/p>\n

For instance, mutual fund firms employ an algorithm to take the predetermined amount from your monthly bank account for a SIP.<\/span><\/p>\n

However, depositories and stockbrokers are not the only entities that use algorithms. Investors actively employ algorithms to decrease human mistakes and boost trading profit possibilities.\u00a0<\/span><\/p>\n

What is Algorithmic Trading?<\/span><\/h2>\n

In algorithmic trading, a deal is placed by a computer program that adheres to a predetermined set of rules. Theoretically, the deal can produce profits at a pace and frequency that are beyond the capabilities of a human trader.<\/span><\/p>\n

The specified instructions can be based on a mathematical model, time, pricing, quantity, or other factors. In addition to providing the trader with prospects for profit, algo trading increases market liquidity and makes trading more organized by minimizing the influence of human emotions.<\/span><\/p>\n

Beginning of Algorithmic Trading in India<\/span><\/h2>\n

The historic SEBI (Securities and Exchange Board of India) circular of 2008 announced that India could now expand its marketplaces to Algorithmic Trading. Resultantly, the Direct Market Access (DMA) program was started.\u00a0<\/span><\/p>\n

Thanks to DMA’s permission, brokers were allowed to offer their technology to non-retail customers. Such clients were permitted to execute transactions using algorithms-powered software.\u00a0<\/span><\/p>\n

Therefore, Algorithmic Trading was conducted in India for the first time without human involvement.<\/span><\/p>\n

Advantages of Algorithmic Trading<\/span><\/h2>\n

Algorithmic trading has a lot of advantages, particularly when deals are carried out as quickly as feasible.\u00a0<\/span><\/p>\n

Some of the main advantages of algo trading include the following:<\/span><\/p>\n

Removes Human Emotions<\/span><\/h3>\n

One of the main benefits of algorithmic trading is its capacity to eliminate human emotions from trading activity. This is because trading actions are outlined and predicted on a particular set of guidelines.<\/span><\/p>\n

Unlike automated trading, human trading is susceptible to emotions that could result in irrational trading judgments. In contrast, algo trading is mostly based on computerized or automatic trades without the involvement of humans.\u00a0<\/span><\/p>\n

So, for instance, in order to prevent emotions, algo trading continually advises traders not to take on more risk than they can handle.<\/span><\/p>\n

Accuracy<\/span><\/h3>\n

Precision and accuracy are essential to achieving success in Algo Trading. Normally, there would be a lot of potential for failure in algo trading if humans participated. <\/span><\/p>\n

Algorithmic trading, however, uses a computer to carry out trades according to a set of instructions, which lowers the risk of mistakes.\u00a0<\/span><\/p>\n

Therefore, planning is suggested to make accurate trading choices that will boost and promote transaction accuracy.<\/span><\/p>\n

Handles Multiple Trades<\/span><\/h3>\n

An algorithmic transaction opens up a channel for traders to execute several trades while maintaining accuracy and speed. It further increases the possibility of making more earnings.<\/span><\/p>\n

The transaction speed has quickly been boosted thanks to better technological development and innovation.<\/span><\/p>\n

Ability to Backtest<\/span><\/h3>\n

Traders must ascertain which components of their trading system are flawed and should propose quick modifications to prevent excessive losses. With algo trading, traders can backtest their trades<\/a> using historical data and compare it with the latest data.\u00a0<\/span><\/p>\n

This method is advised to determine whether transaction results will remain the same.<\/span><\/p>\n

High-Frequency Trading<\/span><\/h3>\n

High-Frequency Trading (HFT) is a unique approach to algorithmic trading that uses highly effective and potent computers to carry out trades in accordance with High-Frequency with predetermined rules.<\/span><\/p>\n

Moreover, adopting sophisticated algorithms allows for the extremely fast processing of these transactions. Trading turnover is typically higher for high-frequency trading system users than for other systems. Besides, algorithmic trading has high trade ratios in addition to large turnovers.<\/span><\/p>\n

Increased Market Volume<\/span><\/h3>\n

Traders now have the exceptional chance to diversify their trading platforms thanks to algorithmic trading. Individuals and businesses that trade can efficiently and quickly exchange enormous volumes of shares.<\/span><\/p>\n

This implies that market participants may allow traders to purchase a large number of shares, sell them very immediately, and profit from a high turnover.<\/span><\/p>\n

Is Algorithmic Trading Legal?<\/span><\/h2>\n

Yes, Algorithmic Trading is legal!<\/span><\/p>\n

Any laws or regulations do not constrain the employment of trading algorithms.<\/span><\/p>\n

\"\"<\/p>\n

SEBI created the regulatory framework to ensure the security of algorithmic trading, safeguard the interests of regular investors, and stop any potential market manipulation. <\/span><\/p>\n

Some investors can argue that this kind of trading fosters an unjust trading environment that hurts markets.\u00a0<\/span><\/p>\n

However, it is not unlawful in any way!<\/span><\/p>\n

What Programming language Does Algorithmic Trader Use?<\/span><\/h2>\n

C++ is a popular programming language among algorithmic traders because it is very effective at processing large amounts of data. <\/span><\/p>\n

The more manageable language, such as Python, might be a better choice for finance professionals wishing to get started in programming than C or C++, which are both more sophisticated and challenging.<\/span><\/p>\n

How to Learn Algorithmic Trading?<\/span><\/h2>\n

Any online instructional materials for algorithmic trading may be challenging to understand. Nobody can stop you from succeeding at Algo trading if you approach your learning process properly.<\/span><\/p>\n

Here are the steps that any ambitious algorithmic trader should work upon:<\/span><\/p>\n

Quantitative Analysis<\/span><\/h3>\n

In quantitative analysis (quants), patterns are found, and models are created to access them. The models are therefore applied to forecast securities’ price movements.<\/span><\/p>\n

Understanding of Financial Market<\/span><\/h3>\n

Since the human mind is naturally wired to learn through observation, it stands to reason that spending time studying the chart will improve one’s understanding of the financial market.\u00a0<\/span><\/p>\n

So if you want to create an algorithm, you must have this information.<\/span><\/p>\n

Programming skills<\/span><\/h3>\n

The next step is to transition to the more complex area of algorithmic trading after mastering the fundamentals. It is to master programming skills if you have never assembled a program.<\/span><\/p>\n

Although it’s not as tough as you may imagine, most individuals find this component of learning algorithmic trading to be the most challenging. Still, you might need a programmer to implement your trading plan, regardless of the technique you intend to execute.<\/span><\/p>\n

A quant developer must have solid knowledge of C++, Java, and Python, and the best way to learn programming is by doing.<\/span><\/p>\n

Technical Requirements of Algorithm Trading?<\/span><\/h2>\n

The last step in Algorithmic Trading is to put the Algorithm into practice using a computer program after backtesting. <\/span><\/p>\n

However, the difficult part is integrating the determined approach into a computer program that can access a trading account and accept orders.\u00a0<\/span><\/p>\n

The prerequisites for algorithmic trading are as follows:<\/span><\/p>\n