Algo Trading – Everything Indian Traders and Investors Need to Know

What is Algo Trading?

Algo trading (also known as automated trading or algorithmic trading) is a way to instruct the computer to execute trades based on pre-conditions.

There are mainly two reasons why people deal with algo trading:

They have a view of the kind of profits an automated trade can generate is not humanly possible.
To remove the human emotion out of trading.

An Example to Understand Algo Trading

The instructions to execute trades are based on any mathematical study like RSI, MACD, moving averages, or any combinations of any technical analysis indicators.

Let me make up an example to help us understand how algo trading works.

Here are the charts of Either motor I have shared in the 200 DMA article:

A simple algo trade can be:

Buy ten shares of a stock when it has three days of closing above in the 5% range of 200-day moving average.
Sell 50% of the holding in the stock when it touches 20% above the 200-day moving average.
Sell the stock if the stock trades below the 200DMA for a week.

So now the buy orders, sell orders along with the stop loss are predefined.

The above example is elementary based on the 200DMA, but one can use any combinations of parameters to create a buy and sell orders.

One can even apply a similar combination of logic on an Index as well.

Is Algo Trading Genuine and Allowed in India?

Yes but don’t take my words on the same. Your exact pattern of trading may raise red flags. So better consult an expert on it.

In many situations, SEBI’s has given a green flag to the use of advanced computer methodology in the equity market.

In a way, it is a system where traders make intelligent decisions, creates arbitrage, uses hedging, and make the market more liquid.

Does Algo Trading Work?

Maybe; maybe not.

I am not the right person to answer because I don’t do algo trading.

I still prefer to share my views of weather algo trading works or not.

There are few people on Quora who have shared it works for them.

But the way I read it is as if it is working for them, why to bother sharing the process. Execute the strategy on every possible stock to the extent you can.

If it isn’t working to the extent it should, why should you care?

So, the right way to look at it isn’t if it is working for others or not.

But …

Can you make it work for you?

Do you make money trading? If yes, can it be automated?

If it can be, you can auto-trade but not otherwise.

Can we Retail Traders and Investor Auto-Trade?

You can’t unless you have a trading or broking software that allows you do configure auto trading.

Like Zerodha offers streak, which I am not sure if it is entirely automated trading, but as I see from the site, they offer automatic notifications.

After one gets the notification, one needs to click to execute the trade.

The idea is, your broker should have an interface that can be used to execute the trade automatically.

If they don’t offer what you need, you need a different broker. Don’t try to develop some code or hack.

Do I need to be a programmer (C++/Python) to Algo Trade?

The answer lies in the above question, which is NO.

You don’t need to be one, but then knowing programming will always help. Not because you can write code but then customize the algo as per your need.

Whatever be the case, I am a programmer and, I haven’t considered algo trading.

Be a part-time investor to generate wealth. Have a return in mind for your money and continue doing what you love doing – which is your job.

Don’t try to be in the market full-time unless you have to. And if you aren’t full-time trader, then don’t consider algo-trading.

How Investors use Algo Trading?

We often confuse ourselves with algo trading as meant for trading, but commonly it is also used by the big investors for acquiring a significant stake in low floater stocks.

Consider an example of a company where average traded volume is low, like in the case of Zydus Wellness.

So, if a mutual fund wants to buy a large quantity of stock, it will inflate the price.

So they can set up an automatic trades of buying any sell orders below certain levels or place a buy order above the highest buy order.

I have seen it happen in Zydus Wellness.

If the sell orders are way above the buy orders, the trade will not execute so if you place a buy order above the highest buy order in the exchange. The next buy order will come just above yours and higher by 5paise.

As in the gif above we see (click the image to view a larger version if isn’t clear), sellers have placed their sell orders at ₹1363.30, ₹1363.35, ₹1364.80, ₹1364.85, and ₹1364.90. We can only see five orders.

And buyers have their buy order at ₹1361.05, ₹1361, ₹1358.40, ₹1358.35, and ₹1357.50.

Now if you place a buy order at 1361.10.

A new buy order is added at Rs. 1361.15

It is so instant that it is undoubtedly an algo trading. Humans can’t do it at that speed.

So, yes, large investors even use algo trading.