Algo Trading is one of the most innovative trading transactions, which work at higher speeds, thus maximizing profit. A computer performs Algorithms or instructions that are provided to it when a prerequisite condition is met. Due to a machine doing the work, the trade is made more efficiently. Other names for Algo trading are black-box trading and automated trading. It performs various functions, and many international corporations have already adopted the idea of trades driven by Algorithm. There are different Algo Trading Strategies which are applied for identifying the opportunities to help them increase their profit or minimize their expenses. Some of the common Algo trading strategies are as follows:
Algo Trading Strategies
- Arbitrage Opportunities
- Index Fund rebalancing
- Trend- Following Strategies
- Index Fund Rebalancing
- Trading Range
- Implementation Shortfall
These strategies play a significant role in the search for new opportunities for the maximization of profit. Performing this requires various trends to be followed. This includes moving averages, price level movements, and other different technical indicators. The arbitrage opportunities are aimed at making up for the differential for purchase of multi-listed stocks at a reduced or lower cost in one of the markets and then to sell it at a profitable price in another market. The index fund rebalancing takes advantage of the trade just before the index fund balances itself out. The trading range involves the identification and definition of the mean, which reverts the high and low range of an asset. When the stock prices become favorable, then it increases the participation rate, which was targeted and vice-versa.
Interesting Facts about Algo Trading
Today, it is vital for businessmen to know about the Algo trading systems. Not only can it help you achieve better profits, but it can also result in higher business growth. Following are several reasons why Algo trading can be beneficial to you and your business:
- Algo trading gives the assurance of trading at the best price, reduces the transaction cost, reduces the possibility of mistakes, accurate and instant order placement with the elimination of psychological and emotional factors.
- There are many essential skills that must be known while using Algo trading like a programming language, statistical knowledge, and an understanding of the financial market.
- SEBI (Securities & Exchange Board of India) permitted the Algo Trading in India in 2008.
- Nearly 70% of the trading volume is constituted by the Algo trading in the present-day developed markets.
- 30% of the amount, which is exchanged in the cash market, is estimated to run through the Algo trading.
- Presently among the institutional investors, Algo trading is incredibly popular owing to its automated nature.
- The Algo Trading is used for research and analysis and trade execution.
- It provides faster and better execution of large orders for reducing the adverse impact of prices, which occurred when trades were executed manually.
- It helps the traders for executing expansion strategy portfolios by the use of more advanced tools in quantitative terms. At the same time, it removes the human emotions, which may affect the performances of trading strategies.
Algo trading can help you monitor stock prices, and automatically place buy or sell orders when optimal conditions are met. The need for manually doing things is eliminated, which removes the hassle of the business owner. Moreover, Algorithmic trading systems can also identify trading opportunities for you, thus, helping you in creating a better business.