Algo Trading vs Automated Trading

Algo Trading : Generating Buy and Sell signals using Computer program.

Auto Trading : Automatically placing  trades in Trading account based on the generated signal.

Stock market is all about buying and selling stocks. If you buy a stock at a price and sell higher, then the difference in the price is your Profit. You will be in Loss if you buy a stock at a price and sell lower.

Now comes the next question, which stock to buy and at what price?
Some people buy on Tips provided by Stock Analyst, Some do their own research about a company and take buy decision and Some simply buy on their Birthday, or on their salary day etc.

In the all above cases, you are the one who take Final decision to buy or sell.

In Algo Trading, the buy and sell decision is being taken by a computer program based on the Pre defined rules and conditions set by the user.

Example:
User sets instruction to Buy, 30 quantity of ‘XYZ’ stock when it crosses 250 Moving Average, or
User sets instruction to Buy, 100 quantity of ‘ABC’ stock when the price of the stock falls by 2%or more

The computer program that takes buy and sell decision can be anything like Excel, AmiBroker, Meta Trader, Ninja Trader, Python, Java etc.

Sometimes, these computer programs also called as Technical Analysis Software or Charting Software or Robo Trader etc.

Example:
Using Supertrend AFL in AmiBroker is also a Kind of Algo Trading.

Stages in Algorithmic Trading

1. Generation of Buy and Sell Decision
2. Execution of Buy and Sell Decision

Generation of Buy and Sell Decision:
1. User sets rules and conditions to buy and sell.
2. Computer Programs continuously monitoring the price data for the given conditions.
3. Once the conditions are met, buy or sell decision is generated.

Execution of Buy and Sell decision:
1. User has to execute this buy and sell decision as real trade in trading account.
2. He can manually place the order using broker terminal or
3. Place it programmatically using API (Auto Trading)

Sometimes back, It is nearly impossible for retail traders to do Algo trading, due to complex and lengthy legal process and huge cost involved.

But Thanks to API, now anyone can do Algo Trading with minimal cost. Many brokers are started offering Trading API to their retail clients.

Video version of this article is available here

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