Traders that employ algorithmic trading entrust their trading software with their hard-earned money. In order to ensure efficient and precise execution of trading orders, the appropriate piece of computer software is crucial. However, bad software or software lacking the necessary functionality might result in significant losses, especially in the lightning-fast realm of algorithmic trading.
An Overview of Algorithmic Trading
An algorithm is defined as a predetermined series of detailed instructions to carry out a certain activity. Each programme follows a precise set of instructions based on an underlying algorithm, whether it be a simple-yet-addictive computer game like Pac-Man or a spreadsheet that offers a vast variety of capabilities.
Algorithmic trading is the process of making a trade order using a computer programme that adheres to a predetermined set of instructions. With a speed and frequency that cannot be matched by a human trader, the algorithmic trading program’s goal is to dynamically find profitable opportunities and place the trades in order to produce profits.
Trading operations based on computer algorithms have become extremely popular due to the benefits of increased accuracy and lightning-fast execution speed.
Who Uses Software for Algorithmic Trading?
Large trading companies including mutual funds, financial institutions, and trading-specific organisations dominate algorithmic trading. Such companies typically develop their own custom trading software, including big trading systems with dedicated data centres and support personnel, given the abundance of resources readily available owing to their scale.
Expert proprietary traders and quants utilise algorithmic trading on an individual basis. For their demands in algorithmic trading, proprietary traders who are less tech-savvy can buy pre-made trading software.
Either their brokers provide the software or they acquire it from other vendors. Quantitative experts often have extensive experience in both trading and computer programming, and they create their own trading software.
Developing or Buying Algorithmic Trading Software?
You may either design your own or purchase algorithmic trading software. While buying pre-made software provides rapid and timely access, creating your own software gives you complete customization options. The automatic trading programme is frequently expensive to buy and may include several flaws that, if disregarded, might result in losses.
The hefty price of the software can also reduce your algorithmic trading business’s realistic earning potential. Although it may not be totally trustworthy, building algorithmic trading software from scratch takes time, effort, and in-depth knowledge.
The Primary Characteristics of Algorithmic Trading Software
Automatic trading has a high level of risk and can result in significant losses. Regardless of whether you want to buy or construct, it’s critical to understand the essential elements required.
Market and Company Data are Accessible
Every trading algorithm is built to react to current market information and price quotations. A few programmes are also specifically designed to take into consideration business fundamentals like earnings and P/E ratios. Both a firm data stream and a real-time market data feed should be included in any algorithmic trading programme. It ought to be built into the system or have a feature that makes it simple to integrate from different sources.
Connection to Multiple Markets
When trading across several markets, traders should be aware that different exchanges may give their data feeds in different formats, such as TCP/IP, Multicast, or FIX. Various feed formats should be supported by your software.
Another choice is to work with third-party data suppliers, who compile market data from various exchanges and offer it to end users in a standard manner. These aggregated feeds ought to be able to be processed as necessary by the algorithmic trading programme.
Customization and Configurability
The majority of algorithmic trading platforms come with common built-in trade algorithms, such as those based on a crossover of the 50-day and 200-day moving averages (MA). A trader might want to try moving from the 100-day MA to the 20-day MA as an experiment. The trader can be limited by the software’s preset functionality if the settings can’t be modified. The trading software should be very customizable and configurable, whether it is purchased or created.
Adaptation to a trading interface
Based on the occurrence of the required parameters, automated trading software places trades. The software should be directly connected to the exchange or have the appropriate connectivity to the broker(s) network to submit trading orders.
Ability to Create Custom Programmes
The most popular programming languages used to create trading software are MatLab, Python, C++, JAVA, and Perl. The majority of trading software offered by third-party manufacturers allows you to create your own unique programmes within it. This gives a trader the freedom to explore and test any trading idea. It makes sense to favour software that allows you to code in the programming language of your choice.
Backtesting using Historical Data
Testing a trading strategy using past data is known as backtesting simulation. Based on historical data, it evaluates the strategy’s viability and profitability and certifies its success (or failure, or any necessary revisions). The availability of previous data on which backtesting may be done must also go along with this need.
Software for algorithmic trading is expensive to buy and difficult to create on your own. Buying pre-made software provides rapid and timely access while creating your own gives you complete freedom to tailor it to your needs. Algo trading in India has grown more effective and liquid as a result of the development of algorithmic trading, creating a highly competitive environment. It has drawn experienced experts, but it has also made it possible for ordinary traders to actively engage in the market.
Prior to participating in algorithmic trading with real money, you must be fully acquainted with the core components of the trading software. Big losses might arise from failing to do so.