By Anoop s (step 2 member ) https://www.talkersclan.com/
Trading is the basic form of exchanging the securities between two entities which works on the basic principle of supply and demand. The technology revolution has had an intense and irreversible impact on the world economy and the Indian stock market has also had its part of share. From its formal inception in the 19th century, the Indian stock market has come a long way and can be said to be in a maturity stage, backed by a developed legal system. The internet has made financial products and services available to more customers and eliminated geographical barriers. However, despite a population of over 1.2 billion, there exist only 20 million active trading accounts in India.
What is Algo Trading and what makes it different.
Algorithmic trading or black-box trading is the process of using computer or a system to run a predefined program or instruction for placing a trade in order to make profit out of market. Here the speed or frequency that is processed is impossible for a human trader to trade in traditional manner. With the use of algo trading, the traders are able to trade without the intervention of human emotions and errors and the entire process of trading has become quite systematic.
The traders get a lot of liquidity in the market because algo trading helps in market large volumes if traders in fractions of second.
How Algo trading works
As algorithmic trading is implemented based on a human’s trading strategy, it will only be making profits if the trading strategy is a winning strategy. Hence, algorithmic trading should be only adapted if you have an winning strategy. The algos can be created using the technical knowledge of programming, like python. However it can also be created using simple technical indicators , stop loss and profit percentage on exchange approved trading platform. Provided, you should be having sound technical knowledge regarding the same.
In terms of indicators, upto 5 conditions can be used and exit can be based in stop loss or on hitting the required target. The platform is provided with important technical indicators such has RSI, Bollinger bands, Moving average and multiple chart patterns. Also you will be provided with the powerful backtesting engine that has the ability to create performance metrics for many stocks at a time and backtest them on the basis of maximum gains, loss, average gain and average loss.
Now, let’s discuss how to implement the algos in a exchange approved platform. Algo trading is provided in quite a few trading platforms. Here I will be presenting it using Zerodha Streak. Streak is an extension of Zerodha Kite, which is the exchange approved trading platform by Zerodha.
The Dashboard view of Zerodha Streak. Here you can create your own strategy, backtest it and deploy it to use it in live market.
For Demo purpose I will create a strategy with following conditions.
Disclaimer: The following readings are only for educational purpose, please do not use these in live market.
Script: Nifty50Duration: 1hPosition:Buy(150qty)Entry: EMA(7) crosses above EMA(21) and 14 RSI crosses above 70Stop Loss % : 2Target profit %: 10Strategy name: EMA21
And finally Backtesting the strategy.
The inputs given will be compiled and formed strategy will be backtested which will be implemented on some of the live stocks. You will get the live market performance of the strategy.
If the strategy meets the user requirement, it can be easily deployed in Live market.
Pros and cons of Algo Trading?
Pros· Executes the trade void emotions· Strong Backtesting ability· The trades are executed 24/7 in live market.· Increased Speed and move accuracy
Cons· Loss of Human control
· Dependency of technology
· Short Life span of algorithms
· Inability to understand the rational market
· Need for constant monitoring
Going further, a smart trader or an investor needs to understand the risk/reward ratio and challenges he has to face with Algo trading. For Eg: a system failure or a network connectivity issue or time lags between the trade order and execution will result in huge financial loss. The more complex the algorithm, the more rigorous the Backtesting is needed to put into action.
The algo trading is yet to be adopted by the retail traders. Hopefully, things get easier with Algo Trading and more retail traders get used to it.
Have a safe and profitable trading.