Trading in the stock market with emotions results in loss aversion, impulsive decision-making, and cognitive biases. Together, all these have a negative impact on trading outcomes. In recent years, algorithmic trading has become a popular strategy among investors as it not only reduces the influence of emotions but also executes trades faster. Discover what is algo trading and how it works.
What is Algorithm Trading?
Algo trading, sometimes referred to as algorithmic trading, is a technique for placing orders by giving a computer program a predetermined set of rules. When the predetermined criteria are met, orders are placed faster and more frequently than a human trader could.
In addition to ensuring the most effective trade execution, placing orders instantly, and perhaps reducing trading fees, algo trading aims to remove emotion from trades. Besides algo trading, you must also understand what is dematerialisation to trade effectively as this is where everyone’s trading journey starts.
How Does Algorithmic Trading Work?
Algorithmic trading is defined by a set of rules that guide you when to buy and sell. An algorithm could simply be programmed to buy a stock if its price goes below 2% of the trade price and sell it if it goes above 2%.
The faster you can make these trades in the market and the more confident you are in your trading strategy, the more money you stand to make. In practice, these algorithms can be tuned to reflect the trading practice. For example, some of the most popular are:
- Trend-Following Strategies: These algorithms are identified as trend-following strategies employed to follow market trends: buy stocks at lower prices and sell them off when their prices fall.
- Arbitrage: These algorithms take advantage of the price differences of the same security in different markets. You buy low in one and sell high in another.
- Mean Reversion: These strategies assume that, eventually, the price will revert to its average, which makes it buy assets when they are cheap and sell when they become too expensive.
Role of Dematerialization in Algorithmic Trading
Instant trade execution, which is essential to algorithm trading, is made possible by the digital storage of securities and stock Trading platform in India. This is why you must start by understanding what is dematerialisation
Dematerialisation refers to converting physical share certificates to digital format for easy management and trading. Choosing the best stock trading platform in India not only facilitates algo trading but also provides access to financial markets, real-time data, and a plethora of investment alternatives.
Conclusion
Algorithmic trading has transformed and revolutionized the way financial markets work, and trades are executed. They have become more efficient and accessible in a tech-savvy country like India. Additionally, you can use processing power to engage in high-frequency trading.
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