What Is Algo Trading: Definition, Pros & How It Works
Table of Contents
Introduction: What You’ll Learn
By reading this article, you’ll understand what is algo trading, how it works, what advantages it offers, and what tools and skills are needed to get started.
This guide is based on real industry practices and regulatory frameworks in India, supported by data and examples.
You’ll learn:- Key components required to begin algorithmic trading
- The difference between HFT and traditional algo trading
- Risks and regulations to watch out for
What is Algo Trading?
Algo trading, or algorithmic trading, uses computer-coded instructions to automate the buying and selling of financial assets. These instructions are based on pre-set criteria like price, timing, quantity, or indicators.
When the conditions are met, the algorithm executes the trade instantly, without human involvement. This leads to faster, bias-free decision making.
How Does Algo Trading Work?
Algo trading combines market logic with programming. Once a strategy is defined (e.g. buy when the 5-minute moving average crosses the 20-minute average), the algorithm monitors market data. When the condition is met, it triggers a trade automatically.
This automation:- Removes emotional decision-making
- Enhances speed and accuracy
- Allows round-the-clock monitoring
Essential Components of Algo Trading
To succeed in algo trading, traders need:
- Market Knowledge: Understand assets and risk appetite
- Programming Skills: Python, Java, or no-code platforms
- Data Analysis: To test, refine, and optimize strategies
- Math & Statistics: For model building
- Strategy Design: Clear entry, exit, and risk rules
- Backtesting: Validating logic on historical data
- Live Market Feeds: Real-time data flow is essential
- Execution Tools: Broker API and stable software
- Risk Management: Stop-loss, sizing, drawdown control
- Monitoring Systems: Regular checks for accuracy
- Regulatory Compliance: Follow SEBI norms
Algo Trading vs Manual Trading
- Speed: Algo trades in milliseconds; manual trades don’t
- Emotion: Algo is logic-based; manual trades can be emotional
- Consistency: Algo follows rules always; manual varies
- Scalability: Algo runs many trades; manual is limited
- Accessibility: Manual is easier to start; algo needs tools
High Frequency Trading vs Algo Trading
HFT is a subset of algo trading with ultra-high-speed execution and advanced infrastructure. It’s used mostly by institutions.
Traditional algo trading is slower and more affordable, suitable for retail investors.
| No | Feature | HFT | Traditional Algo |
|---|---|---|---|
| 1 | Speed | Microseconds | Seconds/minutes |
| 2 | Infra | Co-location, costly | Cloud/API-based |
| 3 | Capital | Very high | Moderate |
| 4 | Use case | Arbitrage, Market making | Trend, mean reversion |
Benefits of Algo Trading
- Faster Execution
- Higher Accuracy
- Multi-Asset Management
- Backtesting & Optimization
- Lower Operational Costs
- Reduced Screen Time
Popular Algo Trading Strategies
- Trend Following: Buy/sell based on moving averages
- Arbitrage: Exploit price differences across markets
- Mean Reversion: Trade when prices deviate from averages
- Scalping: Frequent trades for small profits
- Option Strategies: Based on volatility, Greeks, or OI
Algo Trading in India: SEBI Guidelines
- Must be exchange-approved
- Carry algorithm IDs
- Be risk-audited and disclosed
Risks of Algo Trading
- High setup and maintenance costs
- Total reliance on data and tech
- Poor adaptability in extreme market events
- Overfitting during backtesting
- Regulatory compliance needs
Preparation Required for Other Algo Platforms
- Learn the basics of trading and automation
- Choose a broker with API support (e.g. Groww)
- Design a rule-based strategy
- Use Python or no-code tools to build it
- Backtest thoroughly
- Start with paper trading, then scale live
Start Algo Trading Today: Kosh App – The Stressless Trading Method?
Kosh App by Dozen Diamonds employs
smart, scalable, and emotion-free trading.
You don’t need to prepare for this.
You can try paper trading and then go for the automated real trading.
With platforms like Kosh App, getting started has never been easier.
Next Step: Explore broker APIs and simulate your first algo today.
Sign up for the Friday webinar on Stressless Trading Method & Kosh App
FAQ
What kind of investor benefits from STM?
Is this algo trading?
It’s more than that. STM is a white-box strategy — you can see every move before it happens.
What happens during a market crash?
Can I try before I commit?
Yes. The Kosh lets you simulate the entire ladder before you execute.
Kosh App isn’t just another fintech tool. It’s your stressless path to lasting wealth.
