The integration of AI and coding in several areas automates and eases human efforts. One such area where the usage of coding and AI is being used extensively to maximize profit is the buying and selling of stocks.
Trading in today’s world is not just limited to technical and market analysis and buying stocks through trading platforms. With the help of coding you can maximize your profit and reduce the effort and time of monitoring the stocks.
Let’s deep dive into the concept of algorithmic trading and how defined rules and algorithms can be the way to make you rich.
Algorithmic trading is a concept in which automated trading takes place through computer programs using algorithms using pre-set rules. It can generate profits at a speed that no human could match.
It assesses market data such as trade volume, market sentiments, mathematical models, and historical data to move shares. Although algorithm trading is not as easy as it seems, you should be well-versed in coding and financial knowledge.
Algorithmic trade is the automation of buying and selling of shares. Basically how it works is that you program your computer to buy or sell the stocks when certain criteria are met.
Suppose you’ve programmed your computer to monitor certain stocks let’s name it ABC. The algorithm is programmed to buy ABC stocks when the price goes lower than the average market price of the share, which in trading terms means the stock will get bullish. And when this condition is met the algorithm will buy the stocks this is known as the moving average trading algorithm.
Another type of algorithm is the black box algorithm which is more goal-oriented and requires AI integration. The trader is no longer required to monitor the moving charts and spend time in front of the screen.
However, it is worth noting that too much reliance on technology could increase the risk of malfunction. Technical glitches and execution errors could be the potential threat in such methods.
Before putting your hands on algo trading you should be well-versed in the financial market. Your knowledge matters the most here, after that get yourself strong computing hardware.
Furthermore, you are required to procure trading data which is the most important asset for algo trading. You can easily acquire them through a reliable broker, but you have to make sure that the data is adequate for you. Another main tool you require is a trading bot which you can make from scratch through an API or get them from the marketplace.
No the basic structure of algo trading is prepared but it won’t work without input. some software lets you create your set of rules and modules in Matlab, C++, Python, and other programming languages. To begin with input first start with a small situation then gather the historical data and roughly ideate your strategy.
You can get an idea of how the stocks behave under certain market conditions and fix your entry and exit points. Then start small initially to get an idea of how it works and strategy can be executed through computer-to-computer link (CTCL), APIs, and EOD (End of day historical data).
Exchanges are then analyzed by automation software like MetaStock JStock or AmiBroker. Real-time or historical data is used to generate a trading signal for the program which is sent to the broker via an API. The broker’s CTCL then transmits the signal to the exchange, confirming the trade.
Below are the pros and cons that investors should consider before opting for this method.
| Pros | Cons |
| Automated tradingSaves time and effortEnsures rule-based decision SpeedReduces errors | Mechanical failureDoesn’t consider dynamic and volatility nature while tradingNot suitable for non-tech savvy investorRequires a lot of manual coding if you want to change some rules. |
Good algorithmic trade requires constant practice and skill, this type of trade is not just limited to coding but a lot more. You should consider the highly volatile nature, government policies, market analysis, and a lot more before setting up the guidelines.
Even with the usage of AI, you cannot completely rely on its predicting ability. Although, leveraging algo trading is a great way to carry out high-frequency trading.
Yes, if everything goes right and according to your strategy it can generate lots of profit within a short span of time. But one should not ignore the dynamic environment of the financial market and if any unforeseen circumstances arise it can also result in heavy losses.
Yes, algorithmic trading is legal across the majority parts of the country. But it does create an unfair advantage over manual traders.
This concept is not tested properly and the success rate is still unknown. Also, you can’t always rely on historical data and AI completely.
It depends on your strategy and the latest trends in technology. The one-time setup can cost you anywhere between as low as $2000 and max up to $80,000. Otherwise, you can also opt for a monthly subscription plan for web-based software.
