What is Algo Trading? Using Live Examples

so in this video I want to talk about a topic which I'm really passionate about and that is algo trading and the reason I am passionate about algo trading is I believe that algo trading is the future of trading and if you don't believe that then I will just give you a quick stats 70 percent of trades that are placed as of today on the national stock exchange are derived from algo trading so you can imagine that in an undeveloped market like India have 70 percent of volume is being generated by alko trading five years down the line ten years down the line this number is only going to go up to let's say 80 90 or 95 percent so clearly there are some advantages for algo trading and that's one of the reasons why it is getting so much popular but what I see is that a lot of retail traders they are very much a reluctant to learn about this new technology and they are still sticking to their old regiment of manually placing their orders manually dragging their stocks and that is creating a lot of disadvantage when it comes to their success so what I want to do using this video is to give you a very simple clear understanding of what algo trading is and I will show you using a live example how alkylating is actually done now the motive of this video is to just give you the big picture we will have a series of videos where we will discuss about each in every aspect of an rotating but that will come later in this video let's try to understand what algo trading is all about so algo trading as the name indicates is algorithmic trading now the trading part I'm sure we all understand its buying and selling but the algorithmic part is what we struggle with and to put things simply an algorithm is nothing but a computer program so the idea behind algorithmic trading is that whatever strategy that we have whatever rules that we have whatever stocks that we have we feed all that information to a computer program and then the computer program takes care of the exhibition part on our behalf now this may sound very easy but you need to understand the different components of algorithmic trading in order to be able to do this Swilly so let me take an example so let's say I have a strategy and the strategy is very simple I have a list of some 20 stocks that I track and all these stocks are in an uptrend so the idea the strategy here is that I made for these stocks to come down to their 20-day moving average or it can be 50-day moving average and when they do get there I buy them and I am expecting a bounce from these stocks which they turn today moving average for example and whenever I get a bounce of 5 percent or 10 percent I will put my profit and similarly I have also some targets for my stop-loss so in order to execute this strategy in real life what we have to do well I have to track these 15 or 20 stocks every day I have to check which of them are getting closer to their moving average I have to build some alerts so that when they come to their moving averages I am placing a buy order and when I am getting these alerts I need to be able to place those orders because let's say for example if I am traveling I most likely will not be able to do that and the more stocks that I track the harder it's actually want to become because it's that much of manual work now I can take the same exact strategy and I can build an algorithm for it now how do I do that well for doing that the first thing that we have to understand is that algorithmic trading is done by a strategy in jail so the first component of algorithmic trading is a strategy engine so this is the software this is the app where we are building our logic so whatever our logic is that stocks that are in an uptrend when they come down near the 20-day moving average we have to place a buy order for a certain position size as simple as that now the strategy engine this software we have a lot of software available to our Indian traders software such as a me broker meta trader ninja trader or if you are a little bit more programming oriented you can go through Python or if you are a little bit less programming oriented you can even do this in Excel so there are a lot of place and I will take an example using a broker just in a viola where I will show you how we execute strategies in real-life environment so the strategy engine is where you build the logic the second component of the algorithm trading is a bridge so the strategy engine is for designing our strategies is for testing our strategies for PAC testing all the rules that will be build in this particular engine but for us to be able to execute these orders we have to send these orders send these buy and sell signals from this strategy engine to our brokers platform so for that we need something called a bridge so a bridge as a name indicates is basically a bridge connecting the strategy engine to our brokers platform so that is something we will discuss later in the videos but as of now just understand that it is basically a connection between these two systems the third part of the algorithmic trading is of course your brokers platform now as far as the blockers platform is concerned you need to understand that several brokers they have different ways of handling algorithmic trading some of the famous ones they charge for algorithmic trading some of them they don't so that is something we will discuss later in the subsequent videos but as of now just understand that the broker needs to be able to take those orders whenever they are coming from the strategy engine now let me take a live example just to give you a good sense of how this actually works in real life so this platform right here what you're seeing is called a me broker so a lot of you might be aware of what I mean broker is but for those who do not know what I'm a broker is it is a software where you can build your own logic your own strategies you can back test rate and there are a lot of things that you can do through any broker I have in fact made a special video on I am a broker what it does so you might want to watch that as well but for the time being what I will like to show you is that how I am a broker can create buy and sell signals and automatically send those signals to the brokers platform so as we discussed my broker is the strategy engine and a strategy may look a little bit technical it may look something like this these are the roles that it needs to follow to be able to create buy or sell signals as you can see here this is a buy signal this is the sell signal this is the sell signal this is another sell signal so the second component of algorithmic trading is this bridge as we talked about this bridge is the one which basically connects the strategy engine which is a me broker in my case to the trading platform now your trading platform can be 0 that can be abstract whatever but this is the connection this is the bridge which links these two elements and this right here is my Alice blue account which is my broker's platform so when I fire an order from a me broker the order will be sent automatically to my Alice blue accounts let's quickly see that so let's say I am bullish on the PSU banks for some reason I want to place an order for let's say Union Bank so what I will do is I will just hit this Buy button and you can see immediately I get this confirmation that order has been placed and order has been executed so let's check it out right here so this is my brokers platform this is Alice blue and if I go to the order section in the completed ones I can see that the order has been placed so as this is as simple as that and of course you don't have to push this button this will be done automatically when it's doing algo trading on its own and that is something which we'll discuss later in the subsequent videos on algo trading now as it just saw algorithmic gating is not that hard all that is required is a little bit of a knowledge on your part to understand exactly how a strategy can be translated into a computer program and then the computed program will basically take it on its own now what happens is a lot of people who do not have a technical background they struggle with this aspect because they believe that you know I don't have any technical knowledge I don't know how to program I am NOT a programmer so how can I do all this coding now this is something that you will cover in the subsequent videos and I myself am NOT a programmer but I can assure you that it is not that hard the amount of effort that you need to put to be able to do algorithmic trading is very small as compared to the Ben it's that you get from algorithmic trading and one of the biggest benefits of algorithmic trading is the lack of emotions see this is something which if you are a trader you will understand that we struggle with emotions all the time and the famous ones of course are fear and greed but we also struggle with uncertainty we also struggle with doubt we also struggle with our position sizing so there are a lot of things that we struggle with whenever it comes to trading but in case of an algorithmic trading there is no concept of emotions so this algorithm this program is basically a robot who is executing the strategies on our behalf and this robot for our own good it doesn't feel any emotions it's not scared to cut the losses it's not greedy to take a much bigger position size it basically follows each and every rule right down to the last letter because that's what it is programmed to do the second and a very important advantage which is similar to lack of emotion is the need for discipline so what that basically means is that all those rules that you've created before entering into the trading so the rules related to the position sizing the rules relative to which stocks that you would trade you would not trade what is your maximum loss what is your profit target so all those things that are ultra clear to you before the beginning of a trading session they tend to become a little bit more confusing they tend to become a little bit more hazy as a day passes because we tend to forget and slowly our emotions take over and that is where that discipline becomes a huge problem for successful traders so this is exactly their I see a huge value of algorithmic trading because all these rules that you know are good rules that you know will keep you alive in this market those goals can be fed into this program too in this algorithm and there is no way that the program is going to break even a single rule so having that kind of a discipline that you always dreamed about is possible if you want to go through the algorithmic route now the third advantage of algorithmic trading which I believe is a huge advantage is the speed of execution so right now just imagine yourself to be trading and let's say you're trading in multiple scripts especially those are who are trading in options the prices of these options they move so quickly right that by the time you manually place an order and you get that order executed you have already wasted a huge move in that option so what happens is that like let's say a retail trader is trying to get into an option trade which is kinda dating at let's say ten rupees by the time he or she will be able to place that order and the order gets executed this option might have already run up to let's say 20 24 apiece and when they enter at that price they are becoming very vulnerable to some deep or very steep corrections and this is what causes a lot of people to take losses so this lag this slowness of execution can be eliminated when we are depending on the algorithmic trading because algorithmic trading is 300 times as faster as a human can enter an order because orders are getting executed within milliseconds not seconds within milliseconds the next huge advantage of alka trading is that you don't have to be in front of your computer all day long and this is especially important for working professionals because they have to focus on their jobs and even though they are passionate about the stock market they don't really have the time to punch in the order when the opportunity arrives so for those working professionals if they create algorithm which is not very hard to do by the way all it requires is that you do a back testing you make sure that it is working as for the design and then you leave it and everything else is going to be taken care by this algorithm now clearly algorithm has a lot of advantages and there are also a lot of misconceptions when it comes to algo trading and one of the very popular misconception is that algo trading only works in a directional kind of an environment and it doesn't work in a range bound market and I believe that it is completely false si and algo basically follows the strategy that we dealt algo to follow so if we create a computer program which is designed to follow a and the market happens to be in the range of course it algo is not going to work so it is not the fault of the algorithmic platform or the algorithmic trading that it is not working in a range bond market so what it requires actually is a good strategy which is applicable in the range bound market so your understanding of the market context is extremely crucial for algorithmic trading to work which is truth but it is not the limitation of algo trading that you cannot make money in the range bound market you of course can the other misconception which I see a lot of people having is that if you don't have the computer background if you don't have a technical background you cannot do algorithmic gating and that is again fall it's not true as I said I myself am NOT a programmer and although it took me a little bit time and effort to learn algorithmic trading I am very glad that I did that because now when I look back I feel that how I was trading without algorithmic trading for so many years so the advantage is they completely outweigh the kind of effort that you need to do to start anchor immitating in and to accomplish that one of the things that we will start doing is that we will upload these simple easy-to-understand videos that any retail trader can understand and start doing algo trading so I hope that this video gave you a good big picture understanding of what algo trading is all about in the subsequent videos we will get down to more details we will talk about each of these elements separately and how they work can be alive and if you have any questions of course you can ask that here and I really hope that you appreciate how important algorithmic trading is and you will start with that as soon as possible you

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Keywords: algo trading live, what is algo trading, algorithmic trading tutorial, algorithmic trading indian stock market, algorithmic trading zerodha, alice blue algo trading live, algo trading, algorithmic trading, automated trading system, automated trading software, vrdnation algo trading, algo trading 5paisa, algo trading amibroker, create automated trading system, algo trading for beginners, algo trading motilal oswal, algo trading upstox, algo trading api india, stock market

Id: 9Fi2Je-PSJ0

Length: 15min 0sec (900 seconds)

Published: Wed Feb 05 2020