ALGO TRADING WORK

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HOW DOES ALGO TRADING WORK

MEANING:

·        Algo trading (algorithmic trading) is the process of using computer programs to          execute trades automatically based on predefined rules.

 

      ·        Algorithms analyze market data, identify trading opportunities, and place orders without human intervention.

 Steps in Algo Trading:

Market Data Collection:     





  • The algorithm continuously monitors stock prices, volume, technical indicators, and news feeds.

  •    Example: It tracks Nifty 50 and Bank Nifty price movements.

Trading Strategy Implementation

  • You define rules like "Buy when RSI < 30" or "Sell when moving average crosses down."

  • Example: If the price of a stock moves above the 50-day moving average, the   algo buys shares.

 Backtesting the Strategy:


  • Before using real money, the algo is tested on past market data to check its performance.

  • Example: Running the strategy on Nifty 50’s last 5 years of data.

Execution of Trades:

  • Once conditions match, the algorithm places buy/sell orders automatically.

 

  • Example: If TCS stock price falls by 2%, the algo instantly buys 100 shares. 

Risk Management:



  • The algo sets stop-loss and take-profit levels to control losses.

  • Example: If a stock drops by 5%, the algo automatically exits the trade.

Trade Monitoring & Adjustments:

  • The system continuously tracks market trends and modifies trades if needed.

  • Example: If high volatility is detected, the algo may stop trading temporarily.




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