The Concept of Algorithmic Trading in the Indian Stock Market

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Trading is not just buying or selling securities. Learning different types of trading along with multiple strategies was not easy in the days of traditional trading. But now, using computers and specialised software, trading using complex strategies has become instantaneous. With the introduction of online trading, the term algorithms has gained popularity, and the number of clients who rely on algo-trading is growing day by day.

Algorithmic trading is a mathematical algorithm that analyses every stock movement and then trades in the stock market. Algorithmic trading, also known as computer-directed trading, reduces human labour as well as the cost of stock analysis. The investor manager has complete control over the algorithm trade. This trading innovation continues to give returns, absorb the cost of unwanted expenses, and return profits to investors.

What Does Algo-Trading Mean?

As for the new trader and the intermediate trader, algo-trading is not just a buzzword. The term algo-trading refers to trade using algorithms that leverage previous patterns and data trends as per the instructions for a user-specific application.

The algorithm uses sophisticated tools to make trades in order to maximise potential returns and avoid human errors. All the computation and trade execution done by software comes under algo-trading.

Algorithmic trading in India has increased by more than 50%, and the turnover of this trading is around 9% of the stock market trading. Algorithmic trading is the use of automated transactions to determine when investors enter and exit trades. So, the lack of human intervention saves time and directly increases the chances of following complex trading strategies accurately, with less chance of traders getting lost due to any human error or delay.

Algo-Trading Meaning and Strategies

Algo-trading involves a well-designed custom mix of different mathematical models, which include software codes and formulas for entering and exiting trades. The term algo-trading means to make the task of automating trading easy and advanced. With an algo-trading setup, traders can execute trades with the help of computers without any manual interruption. All the large trading firms often use automated systems to make thousands of trades in a short time.

A trading tool helps to trade in the market by identifying liquidity opportunities and the ability to turn any stock chart information into an intelligent trading decision. The algorithm is designed in such a way as to change the way you trade in the stocks, commodities, futures and options, and other types of financial securities.

Algo-Trading Strategies

In algorithmic trading, there are various strategies that depend upon trading style, assets, and traders. Algo-trading is a coded instruction that makes your trade accurate in terms of timing and pattern recognition.

Algorithm strategies can be explained in the following categories, where you can learn about each algorithm based on its usage and functionality.

Market Trend Detection

For a start, market trend identification in algo-trading is simply a code to understand where the market trends are. So, depending on the price, support, resistance, pattern, and other factors, you can influence your trends and follow a trend, which can be an upward or downward trend. So, the task of the algorithm is to predict the further movement of the price ratio and automate a buy or sell of financial securities.

Mean Reversion

In this type of algorithm, the software measures the highs and lows of a share. The goal of this strategy is to tell investors whether the stock of a particular company is good for an investment or not. Based on the average fluctuations of stock prices, the software provides the data to emphasise which price is the best to invest in this particular trade. As the price of the stock is expected to rise, it is worth buying. And in the opposite case, where there is a chance of the stock price falling, then it’s better to sell and exit the trade. You can also say that this algorithm guides us about the entry and exit points of a trade.


You must be aware of an arbitrage trader. This type of trader is defined by the method of their trade. In this automated trading, the investors take advantage of different arbitrage opportunities. An investor can buy stock from one market at a lower price and sell the same stock at a better price in another market, which can be achieved with speed and accuracy with the help of algo-trading.

Funds Rebalancing

In index funds, there are tons of stocks bought and sold on a daily basis. As the volume is high, performing the trade with manual intervention is quite risky. Therefore, an automated process is used to perform this trade. The manager and technical team prepare and set the criteria for the execution of index fund rebalancing. You can consider an example where changing portfolios helps investors get stocks at the right time and at the lowest transaction costs possible.

Another thing you must know is that algorithmic trading needs a human brain, proper hardware, and sophisticated software. All these components can help you to improve your trade. The quality of your trade depends upon the instruction provided by the portfolio manager and their knowledge about trading strategies. Apart from that, a computer network also plays an important role in connecting your trade to the stock exchange. The speed of the Internet is vital for this type of complex trade.

Technical analysis of the system is essential for both the person monitoring the algorithmic trading and the algo-trading software. Some technical analysis indicators include moving averages, random oscillators, momentum trading, range trading, etc. The list of trading strategies is quite long, and not all algorithmic software consist of all of them. Now, as a trader, you must verify the strategy and anticipated results of the trade. Each trade comes with a risk, whether it’s traditional trading or advanced trading.

The program in this trade is coded in such a way that it can monitor live price, and if the condition is fulfilled, then the trigger activities are executed as per the instruction set by the programmer. So, in this trade, the computer is to place a sell order if the stock price goes below the double exponential moving average.

In short, if you trade using an algo-trading method, you don’t have to be in front of your computer screen for several hours. The program can do trading for you at a lower cost.


If you compare the past and today’s trading methods, there has been quite a difference. Previously, trading was not available for retail investors. But now, anyone can trade in the stock market. If you want to open a free Demat account along with a competitive brokerage charge, you can go on the Share India website or download the Share India app from your smartphone and apply different trading strategies as per your requirements.

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