ALGO TRADING
Algo trading (short for algorithmic trading) is a method of trading
financial assets (like stocks, currencies, or cryptocurrencies) using
computer programs and algorithms. These programs follow a set of
predefined rules to execute trades automatically and efficiently.
🔍 What is Algorithmic Trading?
It involves writing a program that follows certain rules for:
When to buy or sell
At what price
In what quantity
Based on what conditions (like technical indicators, news, price
movements, etc.)
These rules are based on:
Mathematical models
Statistical analysis
Market data
💡 Why Use Algo Trading?
Speed: Executes orders in milliseconds.
Accuracy: Avoids human errors.
Efficiency: Can monitor many stocks simultaneously.
Backtesting: Can test strategies on historical data before real
trading.
⚙️Example Strategy
Suppose you create a rule:
"If a stock’s 10-day moving average crosses above its 30-day moving
average, then buy."
Your algo program will:
1. Monitor this condition.
2. Automatically place a buy order if the condition is met.
3. Sell when the opposite happens or at a profit target/stop loss.
🧠 Components of Algo Trading
1. Strategy: The logic/rules.
2. Programming Language: Python, C++, Java, etc.
3. Backtesting Engine: Tests strategy on historical data.
4. Broker API: To place real-time trades (e.g., Zerodha Kite API,
Alpaca).
5. Risk Management: To prevent large losses.
📈 Common Types of Algo Strategies
Trend Following (moving averages, momentum)
Arbitrage (exploiting price differences)
Market Making (placing buy and sell orders continuously)
Mean Reversion (buy when price is low, sell when high)
High-Frequency Trading (HFT) (ultra-fast trading)
🖥️Languages & Tools Used
Python (most popular for beginners)
Libraries: pandas, numpy, TA-Lib, backtrader
Broker APIs: Zerodha Kite, Alpaca, Interactive Brokers
⚠️Risks
Technical failures (server crash, bugs)
Strategy flaws
Market unpredictability
