How does automated trading work?

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How does automated trading work? In the world of
stock trading these days, algo trading is all the
buzz. But before you decide whether or not you
should dive headfirst into this novel concept and
employ algo trading strategies to make the most
of earning opportunities in the stock market, you
should know how algo trading works. Algo trading
is basically feeding algorithms to a computer as
a finite set of instructions in order to obtain
specific results. In algo trading, the computer
can be programmed to execute orders based on the
market signals. Since the computers are more apt
at handling large quantities of data, they are
able to evaluate market conditions more
efficiently to decide how the buying and selling
decisions should be made. In fact, algo trading
is so effective that it has taken over 40 of all
stock trades on the National Stock Exchange
(NSE) in India. Let us take at how exactly algo
trading strategies work Formulating a
strategy Much like manual trading, automated
trading also relies on creating a winning
strategy. Trend following strategy, mean
reversal strategy, arbitrage, statistical
arbitrage, or market marking are some of the
pre-defined fool proof strategies that one can
program in the computers. You also need to make
sure that you pre-program entry and exit
positions you can also minimize your risk by
including contingencies like stop loss and profit
limit. Writing an algorithm Once you have
formulated a strategy, you need to write an
algorithm to tell your computer how to execute
that strategy. Once the algorithm is prepared,
you need to get it approved by a chartered
accountant. If it is passed by the CA, you need
to take it to the exchange and demonstrate the
strategy and how it has been converted into a
workable algorithm. If it is passed there as
well, it becomes ready to use in the world of
automated trading. Building or buying trading
software Software like Streak, MetaTrader, and
AmiBroker are some of the most popular automated
trading software that have produced results for
a lot of people. Once you have the software,
youll also need to buy data feeds from a vendor
so that the algorithms that you have written can
generate signals based on those live
feeds. Trading Once you have completed all the
above steps, the rest of the work is pretty easy.
After you set up your system, all you need to do
is look at the signals that are generated by the
algorithm and then respond to them accordingly.