Trade Smarter with the Prowess of Algorithms

bygovindaraju.kumarLast Updated: December 14, 2023
Trade smarter with the prowess of algorithms

Remember the movie’ Terminator’ where machines make all the decisions? Imagine, what if machines were trading for you, and you simply sit and relax, enjoying your life!

Yes, that is very much real today,  I am talking about a revolutionary trading system that has become quite popular amongst retail traders. We all commonly term it as ‘ Algo Trading’ or Algorithm based trading

What is Algo Trading?

Assume you have your set of rules for trade rules or signals, some technical indicators, open interest, premium price, time of trade etc and you want to tell these rules to someone, and when these rules or signals align, they can trigger a trade for you with defined stop loss and target.

But is it possible to execute trades ( without emotions) and follow the rules and trading discipline?

No, it is almost impossible for any human to detach emotions from trading and follow trading rules. Here is where machine/Algorithm-based trading comes into the picture.  

Simply speaking Algo trading is a mechanism where a user writes a program and machine learning is used to make investment/ trading decisions, when to buy, how much to buy, when to sell, how much to sell, Targets, stop loss etc all decisions are taken by machines. This completely eradicates the biggest blocker in Trading which is ‘ Emotions’. Let’s understand how a trader can start algorithmic trading. 

Steps for setting up algorithmic trading: 

  1. Creating well-defined trading rules: A trader must clearly set the Entry, Re-entry, position, sizing, pyramiding, Averaging, Exit, Stop loss and Target rules according to a technical indicator, Mathematical formula, Set time or amount of profit or loss, so it could be any or mix of few elements which define a trigger of event.
  2. Coding the algorithm: Today there are many ready-made tools available to create an algorithm, which helps even non-programmers create a highly complex algorithm for trading, but for those traders who still want to code it, there are many tools available like Python, SQL, and Java.
  3. Backtesting: Before an algorithm is deployed LIVE, one should do a backtesting on at least the last 1 year’s trading data. This step helps in checking the efficacy, drawdown, max losing and winning streak, max profit, and peak profit point of the algorithm.
  4. Course correction: If the backtesting gives results that are not favorable, the algo should go back to the drawing table and be reworked for backtesting again.
  5. Paper Trading: Once the Algorithm is able to give favorable backtesting results, the Algorithm can be deployed in paper trading mode, where dummy trades are made instead of real trades, for the user to analyze the real-time impact.
  6. Live Testing: Once an algorithm is smoothly run through paper trading mode for at least 15-20 trading sessions, the user can deploy the algorithm with minimum trading quantity in LIVE market conditions to check slippage, order execution latency etc.
  7. Full-fledged LIVE Deployment: If the algorithm has passed the realistic slippage benchmark, the user can deploy the algo in a full-fledged automated trading model, with error handling backup capabilities and protocol of actionable when an error occurs in the algorithm.

Can retail traders do algo trading and how?

Yes, any trader who has a demat and trading account with a broker that has an API ( Application programming interface) that acts as a bridge between your trading account and a system or program that commands your trading account to trade

What are the tools available for a retail trader to start Algo trading?

  1. Build your algo: Since many traders are used to programming, they have a handy option to build their own trading system by creating their own algo systems and linking it to the Trading account with API, any Paytm Money user can easily do this via referring to our API documents. You can refer to the following url for building your Algo trading system:
  2. Ready-made algo: There are many Algo trading platforms available in markets that allow programming of algo for non-programmers and also provide some easy-to-use DIY algo creation tools with ready-made strategies.
  3. Algo Trading software: For advanced traders, there are softwares that allow the traders to create and deploy their algo in options trading with multi-leg trading features and all possibilities of entry and exit, they can even trade in the cash market segment via these registered software.

Is algo trading advisable to retail traders ?

Well the biggest benefit of algo trading is the removal of ‘Emotions’ from your trading, it does not give a surety of making wealth for sure, in fact, there are possibilities of bigger losses while algo trading if some technical glitch happens while trading

So as a matter of fact, although algo trading is available for retail traders, it is advisable to do ‘ Paper Trading’  ( a form of virtual trading where trades do not enter the exchange system and no real money is involved ) and when you are confident of understanding all about algo trading only then small quantities of real trading with proper Stop losses should be done.

Happy Trading!

Disclaimer: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. This content is purely for informational purposes only and is in no way to be considered as advice or a recommendation. Paytm Money Ltd SEBI Reg No. Broking – INZ000240532. NSE (90165), BSE(6707), BSE STAR MF Member ID – 53873, Regd Office: 136, 1st Floor, Devika Tower, Nehru Place, Delhi – 110019. For complete Terms & Conditions and Disclaimers visit: The securities are quoted as an example and not as a recommendation. Brokerage will not exceed the SEBI prescribed limit.

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