What is Algo Trading?
Algo Trading, also known as Algorithmic Trading, refers to the use of computer-generated algorithms to execute trades that match with the trading strategies in financial markets. That means instead of placing the trades manually, the algo software will take trades in the live market. Algorithmic trading relies on pre-programmed instructions to automatically place trades based on predefined criteria, such as volume, breakout, price action theory, or trading indicators.
In short, a computer-based program that will work for you to buy and sell stocks automatically, quickly, and more accurately. This innovative approach removes the influence of human emotions and makes your trading decisions based on logic and calculation which is happening in the back end. As the Algorithm-based trade is based on permutation and calculation it automatically keeps an eye on the market trend and pulse and manages the risks, and makes sure that every trade runs smoothly and ends up in profit.
Why is algo trading preferred by traders?
Quick decision-making ability: As the trades are executed by pre-defined calculation there is no question of human thinking. It minimizes emotions and executes trades that are free from emotions, ensuring optimal profit-taking and effective loss-cutting decisions.
High accuracy and quick execution: Algo trading executes orders faster and more accurately than humans, which benefits traders by enabling real-time capitalization on market opportunities.
Back-tested Strategies: In algo trading, the trades get triggered based on formulas and calculations. While developing the trading algorithm the strategy is been tested several times using the EOD (END OF DAY) historical data to assess their viability before applying them in live markets.
Consistency and Discipline: We know machines are more consistent in repetitive tasks. It ensures consistency in executing trading strategies, as decisions are based on predefined rules and calculations, which are free from human emotions or biases.
Real-time Trade Monitoring and Customization: Even though the trades are executed from Algo software still the traders can monitor the trade in a live market and make real-time adjustments to algorithms which allows customization and adaptation to changing market trends and conditions.
Risk Management: Many times traders cut the trades in small profits and sit idle when the trades go in losses. They are praying and expecting that the trade will reverse in their favor if the market trend reverses. Whereas algo-based trade hits the SL (stop loss) and waits for a fresh entry or average the quantity to minimize the loss and bring the trade in profit. By using algo trading you can fine-tune your risk management.
Reduced Costs: Algo trading minimizes the trade cost by executing trades at optimal cost and reducing the impact of high premium purchases.
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