Manual Trading vs Algo Trading in India: Which is Better?

Indians have a lot of different perspectives when it comes to trading in the stock market. Some people think it’s an easy way to make money quickly, while others think it’s a huge gamble. Here at marketfeed, we’re on a mission to transform mindsets and establish a strong, positive perspective on trading and introduce you to algo trading! 

The stock market can be one of the most convenient ways to achieve financial freedom— the desirable condition of having enough money in your bank account to cover your expenses without working, running a business, or relying on others. It can offer better returns on your investment than traditional methods like savings accounts or FDs (which doesn’t even help beat inflation!).

There are mainly two activities in the stock market that a retail participant can take part in:

1. Investing
2. Trading

Long-term investing involves buying and holding stocks, bonds, mutual funds, exchange-traded funds (ETFs), etc. for extended periods to grow your wealth. We strongly believe that investing should be a fundamental duty of every citizen!

On the other hand, trading refers to buying & selling stocks, derivatives (futures & options), commodities, currencies, etc. for short periods (intraday or a few months) to generate income in a short period. There are different types of trading such as intraday trading, swing trading, and positional trading. People trade to generate cash flow instead of generating wealth through long-term investing. 

Should Everyone Trade?

The only motive for trading should be to make money or an extra income. Trading is a choice. If you have the potential to make enough income by improving your skills in your current job or business, then trading isn’t necessary.

But if you wish to start trading, you have two options: trade manually or start algo trading!

Manual Trading: Not the Preferred Choice Anymore? 

This is the traditional way of trading where buying and selling stocks are completely based on human analysis, judgment, and intuition. It's not just stocks, you can also trade in derivatives (futures & options, currencies, commodities, etc). In this approach, traders rely on their knowledge, experience, and interpretation of market data, news, and events to identify potential trading opportunities. It involves conducting in-depth research on stocks or other financial assets, following economic news and events, and applying technical analysis techniques to identify entry and exit points for trades. 

What are the Advantages of Manual Trading? 

• Control over trades: Manual trading gives the benefit of having total control over the buying and selling of various financial assets (stocks, futures & options, currencies, etc). Traders can implement or change their strategies anytime based on real-time data. 

• Human intuition: As you gain experience in trading, you will learn to trust your intuition. This helps you make quick decisions and understand the broader context of market movements. With time, you’ll be able to avoid unnecessary trades, manage risks effectively, and spot new opportunities confidently.

• Modification: Manual traders have the flexibility to change their approach and entry & exit points. Modifications can be made based on personal observations, current market situations, news, etc. There is always a scope for optimisation based on unexpected market movements.

• Escaping system errors: Manual trading is completely executed by humans, eliminating the chances of system or software errors. Automated software can have bugs or it can be faulty. They are also prone to get hacked, leading to security breaches.

Disadvantages of Manual Trading:

• Lengthy process: Manual trading requires a lot of time and concentration. Traders must sit for long hours to wait for that perfect time to enter or exit a trade. Market research, analysis, and strategising also consume a lot of time. 

• Sentimental bias: Manual trading is prone to emotional bias due to various factors like overconfidence, greed, fear, and personal sentiments towards trades. This can lead to illogical decision-making, increased risks, and a shattered portfolio.

• Scalability: It’s difficult to scale up manual trading. Keeping track of multiple trades is challenging. Due to a lack of resources, time, knowledge, and research, it is difficult to manage multiple trades.

• Mental stress: At the end of the day, a human has pressure, responsibilities, stress and personal problems. This can lead to wrong decision-making, and increase the risk of ending up in loss.

Algo Trading: Better Than Manual Trading?  

Algo trading is a method where trades are executed automatically using computer programs or ‘algorithms’. These algorithms consist of instructions such as time, volume, and price. For example, you wish to trade a “Reliance” stock, and you can ask your algorithm to calculate its 50-day and 200-day Simple Moving Average (SMA). You can add a condition to trigger a buy signal when the 50-day SMA crosses the 200-day SMA and similarly trigger a sell signal if the SMA goes low. [SMA is a technical indicator which calculates the average of selected prices, usually closing prices, by the number of periods in that range.]

Algo trading has recently gained popularity among market participants in India over the past few years. Currently, 50-55% of the total trading volume in India is executed using algo trading systems! Meanwhile, in the US, algo trades account for nearly 60-70% of the total trade volume!

Advantages of Algo Trading:

Algo trading has helped eliminate the main drawbacks of manual trading:

• Saves time: You don’t have to spend hours in front of a screen, analysing complex trading charts, or stressing over when to enter/exit trades. An algo trading system is like having a team of highly disciplined traders working for you 24/7, never needing a break!

• Execution speed: Algo trading operates at lightning-fast speeds. Trades can be executed in seconds, allowing quick reactions to market changes. On the other hand, manual trading can't achieve such high speed and accuracy

• Eliminating emotions or bias: Algo trading software has no emotions or feelings. So there’s no emotional bias or human psychology at play while assessing, monitoring, and executing trades. All decisions are based on predefined rules and historical data, resulting in purely logical and impartial assessments.

• Backtesting: Algo trading allows traders to backtest their strategies using historical data. Traders can analyse an algorithm's past performance and make necessary adjustments to enhance its effectiveness in current market conditions.

• Growth Potential: Automated systems can manage multiple trades simultaneously. You can execute multiple trades or strategies across different asset classes or markets. 

• Stress-free: Algo trading relies on software that doesn't have any kind of emotions, stress, or pressure. It will work 24/7 on monitoring, analysing, and executing transactions so the traders don’t feel stressed about those tasks.

Disadvantages of Algo Trading:

• System errors: Algo trading depends a lot on technology, so it's vulnerable to technical glitches, connectivity issues, or system failures. These problems can cause major and unrecoverable financial losses. Poor internet connections or latency delays can affect trade execution and pricing.
  
• Entry barrier: Traders will need access to specialised software capable of processing large amounts of data quickly and efficiently. It will be challenging and costly to keep up with the latest technological advancements. You will also require a pre-requisite about knowing coding languages and implementing them. Also, the initial set-up and ongoing maintenance of an algo trading system can be expensive. 

• Lack of human oversight: Relying fully on algo trading without human supervision may lead to unforeseen and unexpected outcomes. Moreover, algorithms may not account for market events or black swan events outside the scope of historical data.

• Over-Optimisation: Over-optimising algorithms based on historical data can lead to poor performance in real-market conditions. While algorithms may show good results in backtests, they may not adapt well to real-world market conditions. Therefore, over-optimising strategies may lead to underperformance. 

Manual Trading vs Algo Trading

Bridging the Gap: Manual vs Algo Trading

Transitioning from manual trading to algo trading could be a difficult journey for most people. While manual trading requires market knowledge and analysis skills, algo trading demands programming (mostly C++, Python, and R) and statistical knowledge/abilities. The steep learning curve for technology and coding can be intimidating!

Algo trading also requires various technological resources like APIs and backtesting tools. This transition can be difficult, but that’s where we come in! Here at marketfeed, we act as the bridging gap between manual and algo trading. We help you automate trading strategies developed by SEBI-Registered Research Analysts. These strategies are seamlessly executed in your own broker account, and you don't have to lift a finger! 

Conclusion

The argument between manual trading and algo trading ultimately comes down to the balance between human experience & skills versus speed, scalability, and accuracy.

Our honest and subjective opinion about algo trading is, that it might be the best choice and fruitful in the long run. A successful trader wishes to have consistency, predictability, diversification, and growth potential. Algo trading offers all of these characteristics. Ultimately, the choice depends on your financial goals, resources, and risk. Continuous learning and adapting to new technology in this market will be the key to achieving the success of traders, regardless of whether they choose manual, algo, or a combination of both!

Bonus: How to Win at Trading?

Trading is not just about having the right strategies or tools; it's a mental game where your psychology plays a crucial role. It doesn’t matter if you do manual trading or algo trading. You need to develop a strong mindset and emotional discipline to win in the long run. Trading can be a rollercoaster ride, with ups and downs, and you might face months of losses and setbacks. During these tough times, it's important to have the psychological muscle to stay resilient and not let emotions like fear or greed cloud your judgment.

The recipe for success in trading is to build a calm and patient mindset, manage your emotions effectively, and believe in your abilities & strategies. Remember, even the most successful traders have faced losses and drawdowns, but what sets them apart is their ability to bounce back, learn from their mistakes, and maintain a disciplined approach. Trust the process!