Embracing the Future with Algo Trading
How will you define Algo Trading?
The Full form of Algo is Algorithm or a Program. In layman terms, Algo Trading (Algorithmic or Programmed trading) is trading with pre-defined set of rules. Before deciding to buy or sell any stock or instrument, Trader has rules to decide why to buy or why to sell. These predefined set of rules based on a person’s own thoughts / tips or charts are nothing but human strategies, applied while making trades. In algo trading, these rules are converted into a computer program. The computer then sends orders to exchange, thus enabling the trade.
Why should Traders adopt Algo Trading?
The biggest culprit in Trading is human emotions. During market hours, the ups and downs of market prices can cloud person’s decision making leading to the high probability of an impulsive decision. Moreover, algo trading can be programmed to take care of the limitations of human perception. Trading with pre-defined rules minimizes human intervention and hence avoids human emotions.
Will it help anyone make more money with Algo Trading?
Algos are expected to have rules for making Entry and Exit (by booking Profit or Loss) in the market. These rules govern the profitability. By adopting Algo trading, you become a disciplined trader. Being a disciplined trader itself is a path to be a successful trader with better profitability.
What is HFT and how different it is from Algo Trading?
HFT (or High Frequency Trading) is nothing but another form of Algo Trading. It is mostly adopted by Prop Desk Traders and Hedge Funds trading with Arbitrage strategies such as Calendar Spread or Inter Exchange etc. Cost of HFT trading is substantially much higher because you are looking for smaller gaps in the market and hence the volume of trading needs to be much higher, needing more funds for trading margin, high speed machine, low latency Platform and hosting of server in Co-location.
I am a Non-HFT Player. Will it help me if I trade through the Servers in Exchange Colo?
Exchange Colo is important where time to execute a trade is crucial to profitability. It also entails substantial cost. Also, the type of strategies generally traded through Exchange Colo are Arbitrage strategies or two/three leg strategies. Non-HFT Traders must thus analyse what are their strategies; whether they will make substantial gains if their trades get executed within few microseconds. If the gains do not justify the cost of Exchange Colo, it defeats the benefit offered by Exchange Colo.
Algo Trading is suitable for which type of Traders?
Algo Trading is suitable for all the traders who want to be disciplined.
Technical Analysts are able to generate their Buy/Sell signals using popular Charting applications. Is that Algo Trading?
Charting applications are one kind of Decision making Algos. These can be easily integrated with the Algo supported Trading Platform such as Presto provided by Symphony.
We have been hearing about Execution Algos. What are they?
Execution Algos are based on set of rules to get the best price execution. They are used for executing large volume trades to minimize slippages, by Wealth Managers to trade on behalf of several of their clients on single click or by an individual trader to define Money Management rules or rules for booking Target and Stop Loss. These Algos were earlier used by Institutional Traders or Hedge Funds but now increasingly being used by Active Traders.
What are the first two steps to become an Algo Trader?
First step is to define your rules to decide when to Buy or Sell (or get these rules from a Strategist). Next is to identify a Trading Platform, which will facilitate such rule based trading and its suitability with your Step 1.
Can Retail clients also do Algo Trading?
Retail Clients should upgrade themselves with an understanding of the Market the behaviour to enable them certified as a Trader, before getting into Algo Trading.
What are the pitfalls of Algo Trading?
Algo trading is analogous to driving on a highway. Just as it is easy to drive on a highway by being a disciplined driver, by following the driving rules and etiquettes correctly, Algo trading is also easy and performs well, when the rules / strategies are built with good understanding of trading, incorporating all the scenarios of trading including actions to be taken by Algo in case of unforeseen events or resorting to manual intervention at the appropriate moment.
What is the one misconception of Algo Trading which you would want to highlight?
Several traders think that Algo trading is a Money-Making machine and the moment I adopt it, I will start minting money. Here, I would like to clarify that Algo trading works on rules set by traders that govern making profit or loss. Algo trading will eliminate impulsive decisions that characterize manual trading. Even timely booking of Targets and Loss through Algo Trading can increase the chances of becoming profitable.
What issues of Traders are addressed or solved by Symphony Fintech?
At Symphony Fintech, our vision is to enable and empower Active Traders to do Automated Trading. We have developed Presto and Blitz, two new age Trading platform which acts as enablers for Traders.
We are also integrating external decision making platforms such as Ami Broker, MS-Excel etc. We have built few intelligent Execution Algos for Active Traders, besides facilitating custom built Algo based trading.For professional Traders-cum-Programmers, we have APIs for all the programs. We have partnered with several Retail Brokers and Prop Desk Brokers so that Traders can get one-stop algo solution.