If you have been following the latest trends in the Indian stock market for some time, then you must have come across a term called ‘Algorithmic Trading’. If you are wondering what it is and how it affects you, then let me explain.

Let us first understand how the process of manual trading works before understanding Algorithmic Trading’

Manual Trading

1. We do our research in off-market hours to understand the historical price movement, technical levels, volatility etc. of the stocks we like.
2. During the trading hours, our eyes track the current prices and send the information to our mind.
3. The mind compares and correlate it with the historical data of these Stocks and tries to find out whether there is any buying or selling opportunity available based on a favourable risk and reward ratio.
4. Finally, the mind sends the information to our hands which then executes the trade.

If you notice that this process involves a lot of information being sent back and forth between our eyes, mind and hands. Naturally, this takes time and, in many cases, by the time we decide to trade, the price has moved already, and the opportunity vanishes.

Algorithmic Trading

Algorithmic trading is heavily dependent upon the principles of artificial intelligence and machine learning. It works like this:

1. The trader programs his/her trading logic into a computer with the help of a programming language.
2. The machine (computer) stores the historical data of the stocks in its database.
3. During the market hours, it continuously analyzes the current prices and trends with the historical data and tries to identify suitable trading opportunities based on the risk and return profile currently available in the market.
4. Finally, it executes the trade by itself without anyone else’s intervention.

This entire process takes a fraction of a second and the trading happens incredibly fast.

The Benefits of Algorithmic Trading

(A) Speed:

Since the computer can process the data much faster than any human mind, the analysis and trading in case of Algorithmic Trading happens much faster done in manual trading.

(B) Accuracy:

Human minds are prone to making errors in calculation and execution. However, the machines almost never make any errors. That is why the trading in Algorithmic Trading is highly accurate.

(C) Consistency:

You may sometimes feel fatigued while doing screen reading for a long time, but machines never get tired. They will look for trading opportunities and execute them for you consistently without stopping even for a moment.

(D) Discipline:

As human beings we are prone to emotions, but the computers are not. As human beings, we often get emotionally attached to the stocks that we buy and do not sell at the right time. However, a machine always buys and sells at the predetermined price without any delay. Hence algorithmic trading happens in a highly disciplined and emotion-free way.

I hope that you have understood the concept of algorithmic trading and its benefits by now.