Basics of Algorithmic Trading

(automated trading, black-box trading, or simply algo-trading) is the process of using computers programmed to follow a defined set of instructions for placing a trade in order to generate profits at a speed and frequency that is impossible for a human trader. The defined sets of rules are based on timing, price, quantity or any mathematical model. Apart from profit opportunities for the trader, algo-trading makes markets more liquid and makes trading more systematic by ruling out emotional human impacts on trading activities.

Suppose a trader follows these simple trade criteria:

Buy 50 shares of a stock when its 50-day moving average goes above the 200-day moving average

Sell shares of the stock when its 50-day moving average goes below the 200-day moving average

Using this set of two simple instructions, it is easy to write a computer program which will automatically monitor the stock price (and the moving average indicators) and place the buy and sell orders when the defined conditions are met. The trader no longer needs to keep a watch for live prices and graphs, or put in the orders manually. The algorithmic trading system automatically does it for him, by correctly identifying the trading opportunity. (For more on moving averages, see: Simple Moving Averages Make Trends Stand Out.)

Algo-trading provides the following benefits:

  • Trades executed at the best possible prices
  • Instant and accurate trade order placement (thereby high chances of execution at desired levels)
  • Trades timed correctly and instantly, to avoid significant price changes
  • Reduced transaction costs (see the implementation shortfall example below)
  • Reduced risk of manual errors in placing the trades
  • Backtest the algorithm, based on available historical and real time data
  • Reduced possibility of mistakes by human traders based on emotional and psychological factors

Risk Disclaimer and Disclosure

This software is meant for education purpose and should be used for Paper Trades ONLY. All the signals generated in this software are based on Technical analysis at particular point of time. Adequate precautions has been taken to make the software error free. However,employees or the developers of the software will not be responsible for the losses or gains made through the software in live market, either legally or otherwise. We shall not be responsible for the failure of connectivity of internet for any reasons whatsoever either for failure of the software or otherwise. It is advisable for the traders/ investors to act cautiously and to cross check information from other sources before taking any investment decisions and without assigning any liability to us. Stock Market trading involves risk and this software does not guarantee the accuracy or completeness of any information and is not responsible for any omissions. Trading in stock market is high risk & high return and we do not accept any financial and/or legal responsibility arising the use of the information. All trade decisions are your own sole responsibility.