A Simple Framework to Start Algo Trading in India

Do you find yourself endlessly staring at trading charts, trying to figure out the unpredictable movements of the stock market? Or does your busy schedule leave very little room for trading nowadays? If manual trading feels difficult now, it might be time for you to consider algo trading!

Instead of spending countless hours glued to your screen, you have a smart trading algorithm constantly monitoring the markets and executing trades on your behalf. It’s quick, accurate, and never needs a break. Sound too good to be true? With algo trading, this can be your new reality!

In this article, we'll walk you through a simple framework to help you get started with algo trading in India.

What is Algo Trading?

Algorithmic trading, or algo trading in short, is a method of trading where computer programs or “algorithms” follow predefined rules or criteria to execute trades automatically in the financial markets (stocks, currencies, commodities, derivatives, etc.). These criteria include price, timing, and quantity instructions. Trading algorithms can analyse large amounts of market data, identify opportunities, and place orders at speeds that no human could match!

By eliminating the emotional aspect of trading, algo trading allows for more disciplined and precise strategies. It’s like having a team of expert traders working around the clock— while you sit back and relax!

How Can You Start Algo Trading in India?

You can participate in algo trading in India in four main ways, based on your skills, experience, and preferences:

1. Do It Yourself (DIY)

In this approach, you handle everything on your own—from developing the trading strategy to coding the algorithm to executing the trades. If you're someone who enjoys coding and wants complete control over your trading system, this might be the path for you. You’ll need to learn programming languages like Python or C++ to code the algorithm and test it to ensure it's effective. While this method requires more time and effort, it offers the most flexibility.

2. Get Help from Experts

If you’ve got great trading ideas but lack coding skills, you can collaborate with developers to code your strategies. Alternatively, you can use pre-built algorithms offered by algo trading platforms available in India. These platforms allow you to automate your strategies without needing extensive programming knowledge.

3. Use Algo Trading Platforms

A growing number of algo trading platforms in India now allow even beginners to execute trades at lightning speed, offering a competitive edge over traditional traders. Additionally, many of these platforms allow users to backtest their trading strategies using historical data, ensuring they’re fine-tuned before going live in the markets! Tradetron, uTrade Algos, Algo Test, QuantMan, and Algo Bulls are examples of popular algo trading platforms in India.

4. Fully Automated Trading Platforms

For those who are new to algo trading, fully automated trading platforms like marketfeed and others provide a hassle-free experience. The platform offers trading strategies designed by SEBI-Registered Research Analysts that can be automatically executed in your broker/trading account, meaning you can start algo trading without knowing how to code or develop trading strategies!

Simple Guidelines to Start Algo Trading in India

Here’s a breakdown of the steps you can follow to kickstart your algo trading journey in India:

Step 1: Learn the Basics of Algo Trading

Before jumping in, take time to understand how algo trading works. Learn about different trading strategies, the role of algorithms in executing trades, and how these systems eliminate emotional decisions. Familiarise yourself with terms like backtesting, slippage, and transaction costs to get a well-rounded understanding. It’s also important to understand the regulations surrounding algo trading in India.

Step 2: Define Your Trading Goals

Ask yourself:

• What do you hope to achieve with algo trading?
• Do you want to maximise profits, reduce errors, or improve risk management?
• Which markets or asset classes do you plan to trade in?

Defining these goals early on will help you choose the right strategy and tools for your journey.

Step 3: Choose an Algo Trading Platform

You can skip this step if you’ve selected the DIY approach we mentioned earlier!

If you’re a beginner, you can choose an algo trading platform to use pre-built strategies developed by experts, backtest your existing trading strategy, automate your strategies seamlessly, execute them, and get P&L reports. 

While choosing a platform, look for:

• Ease of use
• Backtesting features
• Integration with your broker
• Support for your preferred trading strategies

Read: Top 5 Algo Trading Platforms for Beginners in India

Step 4: Pick a Trading Strategy

You can skip this step if you’ve selected the DIY approach we mentioned earlier!

If you don’t have a trading strategy, this is the next step. Some common strategies used in algo trading include:

• Trend Following: By using technical analysis indicators such as moving averages, or trend lines, these strategies aim to recognise price trends. For instance, your algo trading system could automatically buy assets (like stocks, futures, or options) when prices rise and sell them when they fall.
  
• Arbitrage: These strategies exploit price differences for identical assets traded on various exchanges (NSE, BSE). To capitalise on price disparities, your trading algorithm will have to place buy and sell orders simultaneously. These strategies demand rapid execution speeds, as arbitrage opportunities often disappear quickly.
  
• Mean Reversion: These strategies operate on the principle that asset prices and returns eventually revert to their historical average. Your algo buys when prices are low compared to their historical average and sells when they are high, using statistical tests to identify significant deviations from the mean.
  
• Statistical Arbitrage: Use statistical models and machine learning to identify patterns and trade based on small price differences. In this case, your algo trading system has to analyse large amounts of data to find patterns and correlations that can be exploited for trading.

Each strategy has its own strengths and risks. Choose one that fits your goals and risk tolerance. Always remember to incorporate strong risk management practices like stop-loss orders and position sizing.

Step 5: Design Your Algorithm

This step might be challenging for those new to coding or programming!

Once you’ve chosen a strategy, the next step is to turn it into a functional algorithm. If you're coding it yourself, Python and C++ are popular languages used for designing trading algorithms in India. You’ll need to account for data inputs, trade execution, risk management, and performance reporting.

If coding sounds intimidating, platforms like Tradetron or AlgoBulls offer no-code tools to help you backtest simple trading strategies.

Step 6: Backtest and Optimise

Before you go live, it’s crucial to test your strategy using historical data to see how it would have performed in the past. This is known as backtesting. By simulating your algorithm on past market data, you can fine-tune your strategy, eliminate any issues, and improve performance.

After backtesting, adjust key parameters like entry and exit points, position sizing, and stop-loss levels. Most algo trading platforms come with built-in backtesting tools to make this process easier.

Step 7: Monitor and Adjust Regularly

Even after your algorithm is live, it’s important to monitor its performance in real-time and make adjustments when necessary. Market conditions change, and your algorithm may need updates to stay effective. Periodically review your strategy, and adjust it to fit new market conditions or regulatory changes.

Many algo trading platforms provide tools to track real-time performance, monitor risk, and refine strategies based on changing data.

Additional Tips for Aspiring Algo Traders in India:

• Start Small: Begin with a small amount of capital and gradually increase your exposure as you gain experience and confidence in your algo trading strategy.
• Stay Updated: Algo trading is evolving rapidly. Stay informed about new strategies, regulations, and technologies in the market to keep your trading systems sharp.
• Seek Community Support: There’s a growing community of algo traders in India. Online forums, meetups, and courses can help you learn from experienced professionals and improve your skills.

Algo trading opens up a world of possibilities for traders in India, offering speed, precision, and the ability to capitalise on market opportunities that would be impossible for human traders to spot. By following the steps outlined in this guide, you can start your algo trading journey confidently. Remember, success in algo trading requires continuous learning, monitoring, and strategy refinement!