Algorithmic trading

Algorithmic trading, also known as black-box trading in some cases, or simply algo trading, is the process of placing orders in the market based on a certain trading logic via online trading terminals, which execute the instructions generated by various trading algorithms. In simple words, it is using defined set of instructions in the form of algorithm to generate trading signals and placing orders.  Each algorithm can be assumed to have access to current and historical prices of instruments that can be bought and sold after performing computations based on the prices. The algorithm may even split the order into small pieces and execute them at different times to get the best possible prices.

Why Algorithmic Trading

• Segregates Emotions From trading: In this type of system, need for human intervention is minimized and thus decision making is predefined, hence more discipline.

• Scalable: Algorithmic trading strategies are scalable, both in terms of order size that can be executed as well as the number of instruments that can be traded.

• No constant market monitoring: Algorithms can monitor and take decisions and execute trades based on market movements. So, the need to continuously monitor the market manually during trading hours is not required.

• Real-time Quantitative analysis: Algorithms can run on past data to help traders in analysing strategy’s performance in terms of profit and loss as well as some popular performance statistics like sharpe ratio, alpha, beta, etc. The ability to backtest and quantify the strategy's return over risk helps the traders to learn from their own mistakes in a simulated environment before running the strategy in live markets.

Technical requirements for Algorithmic Trading

• Knowledge of a programming language to create and run the algorithms on different trading platforms.

• Access to the live data from the respective market(s) on the trading platform that can be monitored by the algorithms.

• Availability of historical data for backtesting.

• The infrastructure to backtest and trade in real time based on the trading algorithm created.