Updated: Feb 7, 2022
So, friends many smart investors are shifting to Algo trading, Quants trading and even I am not so smart even I am also planning to shift to Algo trading. What are the reasons, what are the plus and minuses of Algo trading? And there are multiple myths about Algo Trading which I am going to burst in this video and I will explain you what is the most important reason why I am trying to shift my strategies to Algo. Its all I am going to discuss in today’s Video so let’s begin.
Hello friends my name is CA Arun Tiwari and you all are most welcome to my channel mark to market. Today we are going to discuss about Algo trading and why smart investors and including not so smart investors including me are trying to shift towards Algo trading. The most important part why people are shifting to Algo training? And it is not that Algo trading is new, it has been there for more than a decade. But if you talk about retained investors, they are not using this fantastic technology which is called Algo trading. Now before I go forward let’s talk about what we are going to discuss in this video one by one.
Before I tell you, what is Algo, let me explain you what Algo can do for you. The 1st important part Algo can do is automate your strategies, it can make it hands free. The 2nd important part is that it can do, it can remove emotions, basically why you want to do training and why you want to make money so that you can enjoy your life and the most important factor is time. So, it can save time for you and you can avoid missing opportunities because once you do screen-based trading or investing, many time when you are not sitting in front of screen, you can miss the opportunity. So, all these four things can be achieved using the Algo training. Now hope it is clear, it is very beneficial. It can help you in different way, even if you are a daily investor or daily trader.
So, it is going to help me in lot of ways but what exactly is Algo trading or quants trading, 1st explain that then we can talk about what other things are there. It sounds like very technical and basically it is not so technical, it is made so technical in words, so people can fool you in the games of Algo. But if I talk about it in simple terms, Algo is nothing but automation of same strategies, whatever rules I am using to enter the market or exit the market or adjust my position, the same rule I am going to use in the form of code and it is going to be happening automatically. Now it is going to depend on me if I am going to make it fully automatic or I can make it such that it only gives me entry and exit positions so you can have complete control. Now you can know what is Quants? Quants is more about statics, so you test your strategies more on the basis of “how much you make and how much you lose”
So basically, before starting any strategy you have to deal with quite the numbers and to see whether your strategy is really making profit when you do a back testing. So, this Quants is the advance version of Algo where you mix your technologies with some more data and data is coming from past as statics and not as a technical analysis. So technical analysis is also on the basis of data nut technical analysis is basically on a smaller time frame when you want to do intraday or something like that. But if I talk about statics, it works on a bigger time frame. So, as I explain always that I am long-term investor, only thing is that I want to make money in small term also when market is not moving anywhere or when the market is simply going up and coming down, and as a long-term investor I get nothing even in that situation, using my hedging strategy, I can make some money and I club all this money and my return becomes very impressive maybe 24-36% so that’s my plan.
So now let burst some myth about Algo trading. So 1st myth is that Algo trading is the high frequency trading, its not. Algo trading is just automation of your strategies. Even you are a long-term investor, you don’t want to do future options still you can use Algo, Algo is a platform you can use for anything, you can use it for Intraday, you can use it for future and options, you can use it for hedging strategy, you can use it for long term investing, anything you can do with this platform. So, this platform is not only for high frequency trading.
2nd question or myth generally we have, sir we have heard that somewhere somebody has blown whole company because, his Algo was defective. It can be possible with us, It can happen with our capital being blown up. So let me tell you that story happened about 20 years back, and technology has improved a lot from there to here. So, you might still be remembering your 1st phone, and touch phone, sometime touch was working and sometime it was not. And see now what kind of phones you are holding. Same with the technology in Algo has also improved a lot and apart from that, exchanges and brokers have also learnt a lot of lessons and they have lot of counter measure things. So nowadays it is not possible.
So, there are two parts in Algo strategies, one part is where it is inducing the signal and 2nd part is when it is executing your signal. So generally, what happen, at the execution time, when you are sending any order to the broker, the broker also have very smart system. They will check whether you have margin to take the option of order or not. So, there is itself a filter and only after that it goes to exchange. Again, at exchange, system verifies whether you are doing right or wrong and then only it executes. Two to three level of checking happens, so it is not possible for somebody to take position where they don’t have margin for that. Now next question you want to be asking, then sir is it possible that I can start my Algo trading from tomorrow as it is so beneficial and all.
So let me tell you like a factory you setup fully automatic factory, it takes time. Same way if you are setting a fully automatic Algo, it takes time. There are different steps to it. So, 1st half is coding your strategy, you have to develop your strategy, you have to develop the arguments, you have to code into whatever technology you are editing. The 2nd step is you have to Back test strategy, whether it is working, generating profit or not. Then 3rd step is simulation, that means you test your strategy in active market but not do any actual trading, you do it in virtual trading platform. And after that you do in semi-automatic mode for some time where, the system, your Algo will generate you signal and you take the signals, you just do the physical punching of orders. Then final stage is where you can put your strategies live.
So, this way you have to work on a strategy which can take anywhere between 3 months to 1 year and then only you can do the automation. Remember you require only few strategies; you don’t have to run hundreds of strategies on Algo daily. Same way when we are doing physical trading, always I say, that work on two or three strategies, and these strategies can give you fantastic returns for whole of your life. So why you have to do a lot of experiment with the strategies, same year when you have strategy automated mode, you don’t have to bother because your strategies are good, they are generating profit and you have tested, you have back tested, you have done simulation and then you have put it into action, now it will not give you any trouble, it will give you consistent returns without much of your time. Now I am not saying you don’t have to look into that, I will still have to look at it sometimes to see if strategy working or not. But the good part is that even when I am not looking, the strategy will keep working. That means I will not loose the opportunity whenever it comes.
So, this is the biggest part. 2nd biggest part is even I am busy, it is not like heaven is going to fall on me, my strategy will take care. So, this all benefit I am going to get, even I have to work one year on that strategy, it makes sense to work one and while. Now next myth you may have in your mind, that sir your Algo should be super-profitable, its not. As much profit your physical strategy can generate, the same kind of returns can be generated by your Algos.
Execution of strategy
The Algos will only make your strategies more efficient, like it will not loose any opportunities, it will not wait because it does not have any emotions, so when you have coded that it should execute, it should execute, then it should enter, so it should enter. So basically, it will mimic your physical strategy, so its not going to be super profitable. So, if your base strategy is good the same ways you have your Algos, so its nothing different, its not super profitable, yes, it is going to be super-efficient and it’s going to make you free, it is going to give you the biggest gift, that’s your time and your life back to you. Now last argument or last question, many of you will have that sir if it so good then why not all the traders are using that. So simply if I can answer this answer with another question, why not all the traders are profitable.
So last argument I will simply say, not all the people come to stock market to make money, there are lots of people for them it’s fun, it’s a game like a video game. Many people they are just simple addicted, they don’t have any other work, they simply wake up in the morning, they have to do something. But there are very few people who basically come to stock market with intention of making profit and those kind people are real or actual investors who want to make money, so its not like that if all the people are using something, it is good, it is not like that if nobody is using something then it is bad. It all depends on you. And if it is working for you, if its going to work for me, I don’t bother how many people are doing Algo trading and all.
So going forward friends, my channel will be more dedicated towards how I make strategy and make it automated. Because I feel that at the age of 37, if I am going to kill my remaining life just doing the investment, when I will get my time to travel, to enjoy my life, when I am going to get my time to spend that my that I am earning and is it not a shame that we are going to make money and we don’t have time to spend that money, and at the end of the day we are going to pass that money who doesn’t deserve it. Most of the times it happens like that. So, 1st thing is that we have to learn to make money and 2nd we have to learn to enjoy also. That’s called having a cake and eating it as well. So upcoming videos, I am going to talk more about Algos, and I am going to solve all the queries that you are going to have. Also going to introduce you the different kind of software, so it is going to be my journey to the Algo and I think all of you will enjoy this journey coming along with me. So that’s all friends in this video, till the time thank you. Have a nice day!