Beginners Guide to Robo Trading and Algo Trading

This comprehensive Robo Trading & Algo Trading guide includes detailed information about Robo & Algo Trading. Download the PDF for FREE and take a step ahead in trading.

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Chapters

What is Robo Trading?

How Does a Robo-Advisor Work?

Advantages of Robo Trading

Types of Robo-Advisors

Robo Advisors vs Human Advisors

How Do I Choose Best Robo Advisor?

Limitations of Robo Trading

How Should You Start Your Investing with Robo Trading

What is Algo Trading?

How Does a Algo Trading Work?

Advantages of Algo Trading & Investing

Types of Algo Trading & Investing

Algo Trading vs Tradition Trading

How Do I Choose Best Algo Advisor?

Limitations of Algo Trading

How Should You Start Your Investing with Algo Trading

#1

What is Robo Trading?

In the last decade, the financial advisory services industry has rapidly evolved with the emergence of new approaches.

Initiating financial planning and investing for future goals has always been a challenging task for almost every investing beginner.

With the availability of a wide variety of financial products, arriving at an investing decision seems like a complex process.

There are so many things to understand such as individual goal assessment, return, liquidity, the risk involved with the product and its tax implication, etc

Making a great investment decision is never easy. This is when people plan to approach financial advisors.

Traditional human financial advisors are quite expensive for investing beginners. The emergence of Robo financial advisors has thus gained a lot of popularity during the last few years.

This new style of financial advisory services available in the market makes it easy for investors to avail the benefits of advisory at a much lower cost for minimum investment. So, what is Robo trading or Robo advisory services?

Let’s understand in detail

 

The Emergence of Robo Trading

Let’s first understand how this concept of ‘Robo trading’ emerged. ‘Robo Trading’ which is also known as ‘Robo advisory’ is a digital, algorithm-based financial service that was first introduced in the USA in the year 2008.

With its unique features like operational ease, low cost, and minimum investment, Robo advisory services have gained a lot of popularity among beginner investors. This revolutionary online financial services platform is gaining a lot of popularity in India too.

The number of Robo advisors is increasing in India year on year with the traditional financial advisors. As per SEBI (Securities and Exchange Board of India), there are more than 1300 registered investment advisors operating in India.

Though most of these registered investment advisors are traditional human financial advisors who provide face-to-face financial services, these services come at a premium cost which many small and first-time investors cannot afford.

Specifically, the investing beginners and young investors seek financial services at a lower cost with minimum investment requirements.

Robo advisors provide customized solutions to such investors in the most efficient manner.

 

What is Robo Advisor?

Robo trading is an automated investment service that offers financial solutions based on algorithms and mathematical rules after analyzing the specific needs of the investors.

The factors that are taken into account for analysis by Robo advisors are your financial positions (cash flows, expenses, and assets), financial goals, risk-taking ability, return expectations, and time horizon.

As Robo advisory service is easily affordable with technology-based operational efficiency, the popularity is rising over traditional players.

Other factors like rising financial awareness, change in investors’ investment behavior and digitalization in every space have also made a way for Robo advisors.

According to the projections by Statista, Robo advisory services segment in India is expected to grow with a CAGR of 43.80% during 2020-25 to reach $53.90 Billion by 2025.

Robo advisors do not require investors to have in-depth market knowledge. On this digital investment advisory platform, the investor needs to answer a few questions relating to the investment goals, risk-taking ability.

Based on the input provided and the specific needs of the investor, the Robo advisor can help build an investment portfolio, portfolio rebalancing and also can help in complex activities like tax-loss harvesting.

Robo advisor takes into consideration of investors’ personal preferences such as risk tolerance, future financial goals (both short-term goals and long-term goals), and time horizon to reach those goals.

While recommending an automated investing portfolio for investors, robo advisors also consider factors like market conditions, volatility in the market, and performance of various asset classes (such as equity, debt, fixed income, real estate, and gold, etc.) along with your personal preferences.

Robo advisors not only build your investment portfolio as per your investment needs but also monitor your portfolio, rebalance them as per your risk appetite, and need to help you reach the desired goal.

As the service is automated and digital, it involves minimal human intervention which makes the entire investment approach more efficient. 

 

Robo Advisory – a New Concept in Financial Planning!

Robo advisory is the new way of looking at financial planning. Young investors and experienced investors who have tried a few financial advisory services and if nothing seems to have worked out, Robo advisory can be a great option to try for their long-term financial planning.

Similar to traditional human advisors, Robo advisors also evaluate your risk, assess your need based on the questionnaire answered by you, understand your preferences and then algorithmically build a suitable investment portfolio for you.

Services offered by the Robo advisory platform are many which include goal-based asset allocation services, automated portfolio plans, rebalancing, reallocation of the portfolio along a comprehensive and personalized financial advisory service.

There are mainly three types of Robo advisors operating in the market – fund-based Robo advisors, equity-based Robo advisors, and comprehensive Robo advisors

 

Future Outlook of Robo Trading

As millennial investors are more in the number who prefer technology-driven services, Robo advisory services have high scope to grow in the coming years.

Aadhaar authentication, DigiLocker, and e-KYC facilities available to the investors pave a way for online financial advisory platforms like Robo advisors.

The global Robo trading landscape has witnessed huge growth over the last few years and is expected to grow exponentially.

Keeping in view the ‘Digital India initiative’, India is also a great marketplace for Robo advisors in the future.

As per the forecasts of Statista, asset under management (AUM) of the global Robo advisory segment is expected to reach US $ 2,842,101 million by 2025 and the number of users or investors is expected to grow to 478.86 million by 2025.

Source

Robo-Advisors – Worldwide | Statista Market Forecast

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#2

How Does a Robo-Advisor Work?

Every individual wants to grow wealth. But many are clueless about the way forward to reach that goal and create wealth.

Every future goal needs you to plan in advance and be financially ready.

Be it your long-term goals like building a retirement corpus, wealth creation for children’s higher education and for children’s marriage, or be it your short to medium-term goals like home buying or vehicle buying, you need to plan in advance in a disciplined manner.

You need an expert by your side to do so. However, everyone may not be able to afford the advisory services. But automated trading bot can offer you advisory service at an affordable cost. Automation has a huge impact on today’s life.

Every aspect of our life is dependent on automation which includes managing our personal finance. Automation has also made your investment planning an easy task. Robo advisors using automated trading bots can manage your wealth.

Robo trading is a digital financial advisory service that has minimal human intervention to manage your investments.

Robo trading software works on the basis of algorithms and advises investments based on the inputs provided by the investor through questionnaires. Let’s understand how does a Robo advisor work.

 

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Robo trading works on algorithms. Robo advisors use algorithm tools to analyze your investment preferences and to evaluate your risk-taking ability.

Setting up an account on a robot trading platform takes only a few minutes. Robo investing process is easy and automated which involves the below steps.

 

1. Open an account

Once you choose to take your investment journey on the Robo trading platform, you need to initiate the process by creating an account online.

There are many wealthy startups that offer Robo advisory services in India.

To start your effortless and automated investing journey, all you need to do is provide a few of your personal information (such as name and email ID) and create an account online on the Robo trading platform.

The estimated account setup time would be less than five minutes with only a few clicks. 

 

2. Fill up a questionnaire

Robo advisors ask you to fill up a questionnaire that contains a set of questions asking for your demographic details such as age, gender, marital status, education, employment, and income, etc.

The questionnaire also contains a set of questions asking for your psychographic information to understand your investment interests and opinions. Based on the psychographic information Robo advisor understands your investment behavior. 

 

3. Set up an account

Once you create an account on the Robo trading system, you need to set up your Robo advisory account. Setting up an account is quite a simple process.

Choose your purpose of investment or the goal for which you are investing. And then, link a bank account to fund your investments.

Once your Robo investment account is linked to the bank account, your investments will be automatically funded. With the ease of automation, lower cost and goal-based investments will help you grow your money and create wealth.

 

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4. Robo advisor comes into action

Once you finish filling up a questionnaire and complete setting an account, Robo advisor starts the work by using the investment strategy suitable for your goal and preferences.

Robo advisor follows modern portfolio theory (MPT) that focuses on maximizing the portfolio return at a lower cost.

Hence, Robo advisors rely more on index funds and exchange-traded funds (ETF) that are low-cost equity investments.

Along with focusing on cost efficiency, Robo advisors also focus on diversification of portfolios to reduce the risk and maximize the return.

Robo advisors also diversify your investments into different asset classes as per your investment preferences and financial goals.

Robo trading uses advanced algorithm tools to build a diversified portfolio to achieve long-term financial goals.

 

5. Customizes your investment as per financial goals

Based on all the information collected from you on the Robo trading platform, the Robo advisor understands your investment preferences, financial goals, risk tolerance.

Based on this understanding, Robo advisor does your portfolio asset allocation and builds a portfolio suitable for your financial goals. Asset allocation differs as per your financial goals.

For example, if you have to save for retirement goal your portfolio needs to have more equity-based investments which have the potential to deliver higher returns over the long run.

On the other hand, if you are saving for buying a car in the next two years, you need to save in more liquid and less risky assets.

 

6. Robo advisor monitors and rebalances your portfolio

Robo advisor not only builds an automated investment portfolio for you based on your preferences, but it also constantly keeps a check on your portfolio.

Robo trading software automatically adjusts your investment portfolio in the best possible way to stay on track to reach your financial goals.

Robo advisor does periodic buying and selling in the portfolio is done to rebalance the investment portfolio.

Robo advisors use computer programs to build an investment portfolio of your suitability and monitor them and rebalance them depending on your preferences.

When you opt for Robo advisor you do not need deep pockets to spend as advisory fees and you do need to have in-depth knowledge of the market.

You can put your investments on autopilot mode by opting for Robo trading services. Just like traditional financial advisors, Robo advisors are also registered with the Securities and Exchange Board of India (SEBI) to provide investment advisory services.

With Robo advisory services available, every investor can now participate in the process of wealth building without the heavy cost.

Robo advisors manage your portfolio digitality is professional and in the most efficient manner.

In a nutshell, Robo advisors work on computer programs or algorithms. Algorithms are nothing but a mathematical way to solve any problem.

Robo advisors are extremely suitable for young and investing beginners. Build your wealth portfolio with ease and cost-effectiveness by opting for Algo trading.

 

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#3

Advantages of Robo Trading

Now, digital is the new way of life. A covid-19 global pandemic has taught us the importance of digital transformation for every space of our life.

Have you ever thought you would depend on a ‘robot’ or software automation for your investment decisions?

All of us want to make the best decision when it comes to putting our hard-earned money to grow.

Do you know all this can be done with ease in a cost-effective manner using Robo advisory?

Robo advisors are the new type of wealth advisory offerings. Best Robo advisors offer automated asset allocation suitable for your specific goals and risk tolerance level, tax-loss harvesting, and automated rebalancing at a relatively lower cost.

 

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Robo trading system is based on algorithms that will help you make the right investment decisions to achieve your long-term financial goals.

Though traditional human financial advisors are preferred for comprehensive financial planning and wealth creation, Robo advisors stack up in certain aspects of financial advisory.

Let’s take a look at the advantages or benefits of availing Robo advisor for wealth creation.

 

1. Competitive edge due to automation

Digital advisory services provided by the Robo advisors provide a competitive edge to investors in terms of operative ease and convenience.

Investors can conveniently invest in various asset classes like equity, debt, real estate, and gold, etc. within in few clicks through mobile applications.

Robo trading software is easy to operate, flexible, and safe. Specifically for millennials who are tech-savvy investors, Robo advisor is a great choice to save on time and cost.

Robo advisors are accessible round the clock which makes them shine over other financial service offerings. Along with convenience, cost-effectiveness is one of the most important benefits offered due to automation.

Generally, the traditional human financial advisors charge more than 1% of your assets under management as the financial advisory fees.

However, due to the digitalization of financial advisory services and less human intervention, Robo advisor offers advisory services at a lower cost which is around 0.25% to 0.80% of your asset under management.

Fees may depend on the type of Robo advisor you have opted for. There are even free Robo advisors in India. The reduced cost will have a huge impact on the optimization of portfolio return.

 

2. Error mitigation and accuracy

As Robo advisors work on cloud-based applications, errors are minimal. Unlike traditional human financial advisors where human errors are common, an automated advisory system like Robo advisors helps in error mitigation.

As the entire process of wealth advisory and financial planning is automated, there is negligible chance of fraudulent activities.

Moreover, Robo advisors mitigate investment decisions influenced by human emotions.

 

3. Strategic portfolio creation

Robo advisors offer the benefit of automatic portfolio creation that is suitable for your financial goals, risk appetite, and time horizon in a strategic way.

Artificial intelligence used in the Robo trading system does all the groundwork required for investment portfolio creation.

It considers all the factors and market conditions. Robo advisors build a diversified portfolio by investing in passive funds and investment options that require no strict monitoring of the market.

Robo advisors not only help in portfolio creation but also help in rebalancing and monitoring your investment portfolio based on the suitable asset allocation as per your financial needs and risk appetite.

For example, let’s say your target asset allocation as per your risk profile is 90% equity and 10% bonds. Let’s say your investment portfolio asset allocation drifts to 80% in equity and 20% in debt.

The automatic notification gets triggered and the Robo advisor will take quick action of rebalancing your portfolio and bring it back to target asset allocation of 90% equity and 10% bonds.

This will be done by automated selling of bonds and buying of equity to rebalance the portfolio asset allocation.

All the above advantages offered by the Robo advisory system increased internet penetration, and more focus on digitalization are strengthening the Robo advisory market.

As per the reports from Hearts & Wallets, market research and benchmarking firm millennials and Gen X use the Robo trading system in maximum percentage.

50% of millennials having household assets of more than $500,000 use Robo advisors as per the survey of Hearts & Wallets.

Most of the Robo users are considered first-time and young investors.

However, increasing usage of this new financial advisory offering is a thing of concern for established firms that only offer traditional human financial advice.

Let’s take a look at the percentage of Robo users by investible assets as taken from Hearts & Wallets Report, September 2020.

 

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Advantages of Robo Trading

(Source: Hearts & Wallets report, September 2020)

Especially post covid-19 pandemic, the need for digital advice is growing. One of the major plus points of digital advisors or Robo advisors is that you don’t need to have a higher amount of money to start or avail yourself of investment advisory services.

You can avail Robo advisors with even a minimum balance requirement. There is some free Robo advisor who charges no fees for rebalancing and managing your investment portfolio. Such advisor mainly invests in passive investment options. 

However, there are also certain limitations to the Robo trading system. As the digital advisory system is for all, it lacks personalization and flexibility.

Without face-to-face interactions, there would be a lack of understanding of investor behavior and views on personal finance.

With Robo advisors, financial advisory services are now accessible and affordable. Robo advisor system may not be suitable for investors who are not tech-savvy and do not follow passive investing strategies.

As a cost-effective alternative to traditional investing, Robo advisors are best suited for novice investors with low-net worth.

 

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#4

Types of Robo-Advisors

The emergence of Robo advisors has brought in the revolution in the financial advisory marketplace. In today’s digital world, investors demand convenience, a quick, no-hassle, and transparent system for financial advisory.

There is a wide variety of investment products available in the market. But, if you do not know which is right for you, achieving all your financial goals would get difficult.

That is when the robot advisors have emerged to bring in transparency and to replace human tasks in advisory space. The robot trading system has even encouraged small investors and young investment beginners in India.

Robo advisors have been gaining popularity over the years to provide effective and simple automated financial advisory services.

With the passing days, the Robo trading system in India and across the globe is evolving. The model of Robo advisory is evolving for a better tomorrow for investors by reducing human intervention.

However, traditional human financial advisory can give you extensive advisory services, especially if you are an active investor.

Unlike traditional human financial advisory, Robo advisor may not advise on various crucial things like fund switch, planned exit from an investment product, and strategies and investment techniques during market crisis.

Robo advisors are largely beneficial for investors who cannot actively manage their investment portfolio such as salaried individuals.

 

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Types of Robo Advisors

Robo advisors in India are mainly categorized into three types. Following are types of Robo advisors operating in the Indian financial sector:

 

  1. Fund-based Robo advisory
  2. Equity-based Robo advisory
  3. Comprehensive wealth advisory

 

Let’s briefly understand each type of Robo advisors operating in India.

 

1. Fund-based Robo advisory

Fund-based Robo advisory is a Robo trading system wherein investment suggestions given by the Robo advisors are dependent on the investor’s risk profile and financial goals.

Mathematical algorithms in the Robo trading software evaluate investors’ risk-taking ability and understand the specific financial goals through inputs given by the investor in a digital questionnaire.

Recommendations based on the goal and risk profile are made to invest in passive funds. Hence, fund-based Robo advisors are free Robo advisors as they charge almost nothing for financial advisory services offered.

Robo advisors in this case would earn commission from the fund houses and distributors and offers advisory service at no charge to investors. Fund-based Robo advisory is most suitable for novice investors who have no experience in the financial market.

Instead of directly participating in the equity or investing in direct equities, investors with limited market knowledge can seek guidance from Robo advisors to start building their investment portfolio for future goals.

Risk-averse investors can definitely take this advisory approach into consideration. Choosing the best Robo advisor is also important to make the right financial planning and to start the wealth-building process.

 

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2. Equity-based Robo advisory

Equity-based Robo advisor starts working on creating the right portfolio mix for investors to build wealth as soon as the Robo advisor account is set up. The main focus in equity-based Robo advisory lies in an equity portfolio.

These fund advisors use multiple brokers to do fund execution. Depending on investors’ investing patterns and preferences, equity-based Robo advisors recommend thematic funds and sector-based investment choices.

These types of Robo advisors thus charge some fixed fees on annual basis. Sometimes the fee may depend on transactions, which may vary from one Robo advisory wealth startup to another.

Equity-based Robo advisory is suitable for investors who have a decent understanding of the equity market with moderate to aggressive risk-taking ability.

With the guidance of Robo advisors, investors can optimize their portfolio returns over the long run.

 

3. Comprehensive wealth advisory

In comprehensive wealth advisory, Robo advisor takes a holistic approach towards investors’ financial planning and wealth-building process.

It all starts from understanding the investor’s financial positions, assessing the need, evaluating the risk, tax planning, and estate planning to give investors a comprehensive financial advisory solution.

Robo advisor understands the complex need of the investor and accordingly makes recommendations.

Hence, these Robo advisors are usually fee-based and would charge a percentage of asset under management as an advisory fee.

Comprehensive wealth advisory can be a great option for experienced investors. The entirety of your financial life is taken into consideration and is mainly meant for the long term.

Though the Robo trading system is evolving year on year, this automated financial advisory system does not follow complex investment strategies like traditional investment advisors. There are many best Robo advisors available in India.

You need to consider various factors like best Robo advisor returns, user experience on the Robo trading platform, usability, cost or fees, and accessibility while choosing the Robo advisors.

Along with choosing the right type of Robo advisors, you also need to choose the right Robo trading platform to optimize your investment returns to reach the desired goal.

Most of the Robo advisors today follow modern portfolio theory that diversifies the portfolio and maximizes the return to build significant wealth.

Robo advisors are budget-friendly and are accessible round the clock which makes them stand out. Choose the right type of Robo advisor for your smooth investment journey.

 

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#5

Robo Advisors vs Human Advisors

Traditionally, there have been only two choices for investors to plan their investments.

Either they have to do their own research and invest themselves or take the help of human financial advisors to manage their hard-earned money.

Today, financial advisors are available in different forms with the emergence of newer advisory models.

Mainly, there are two categories of advisors to choose from – Robo advisors and Human advisors.

Robo investing is a new type of financial advisory offering that has started gaining popularity in recent years due to its unique features like automation, cost-effectiveness, operational ease, and many more.

On the other hand, human advisors are traditional and well-paid financial advisory offerings that involve human intervention in every step of the process.

Robo trading system is growing by year on year with the huge interest in this model among millennials and Gen X. As per predictions from analysts, Robo advisory system will become a $1.2 trillion industry by 2024.

Both Robo advisors and traditional advisors have their own pros and cons for the investors seeking to avail themselves of the advisory services.

Let’s take a look at the difference between both advisory offerings so that you can decide which one suits you the best.

 

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Robo advisors

Robo advisors are the robots who would be your investment guide based on the few questions answered by you.

Robo trading system works based on algorithms that understand your investment goals, evaluate your risk profile, and know your investment preferences before making investment recommendations to you.

Robo advisors provide their services digitally on mobile applications using algorithmic tools. In Robo trading software, you need to leave your hard-earned money in the hands of the computer programs to grow.

The main highlight of the Robo advisor is that it is completely technology-driven which eliminates the possibility of error and mitigates fraudulent activities. 

Robo advisors are quick and convenient as the services are automated. This is what makes Robo advisors suitable for young professionals who are tech-savvy and wants everything quickly.

Also, Robo advisors are cost-effective in comparison to traditional human advisors. There are free Robo advisors who charge almost nothing as they follow a passive investing strategy that invests majorly into index funds and exchange-traded funds (ETFs).

Robo advisors who provide equity-based advisory that is suitable for your financial goals and risk appetite, usually charge fees ranging from 0.2% to 0.8% of assets under management.

However, Robo advisor has been evolving over the years. Now, many Robo advisors provide hybrid services which are a combination of automated advisory and human advisory.

Apart from the advantage of low cost, it’s easy to open a Robo advisor account.

Robo advisors are automated trading robots who can optimize multiple portfolios instantly without any error. Best Robo investor can provide tax-loss harvesting on a real-time basis.

Robo advisor makes automated strategies to reduce tax losses by replacing the assets that have lost money in the market with similar types of assets. Basically, Robo advisor is suitable for investors who want to invest and forget.

 

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Human advisors

Human advisors are the financial experts who are always available for face-to-face interaction to outline your financial journey and work towards it.

Even during the covid-19 pandemic, human financial advisors modified their service offerings and made it all possible through video conferences and teleconferences to provide investors with comprehensive financial advisory solutions.

The main highlight of the human advisor is the human element involved in it which lacks in Robo investing. You can get an emotional response from a human advisor at every phase of your financial journey.

Traditional financial advisory works on the basis of strong relationship building which is extremely important for long-term financial planning.

When it comes to the cost of advisory, human advisors are expensive in comparison to Robo advisors. Human advisors are experts who plan, educate and guide investors to reach their financial goals.

Human advisor understands your preferences, help you define your goals, assess your risk, educate you on a financial product, and give you handholding support throughout your financial journey by giving personalized financial solution.

 

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Here is the difference between Robo advisors and human advisors

 

Characteristics Robo advisor Human advisor
Advice type Digital and completely automated based on the inputs given in the questionnaire Customizable personal advice based on the face-to-face meeting
Communication Automated and program-based communication which involves limited human intervention Face-to-face communication and personal advice with an emotional response. This is completely based on the human element
Services Services involve only investment advisory. However, depending on the type of Robo advisor chosen you can avail goal-based advisory to comprehensive wealthy advisory services Services are comprehensive and extensive in nature that provides holistic financial solutions.
Investment strategy Most of the Robo advisors follow modern portfolio therapy that is based on a passive investment strategy. That means ‘set it and forget its style of investment. Traditional financial advisors provide both passive and active investment solutions depending on the investor preferences.
Technology Robo advisor uses advanced technology that is based on artificial intelligence. Robo advisors work on algorithms and cloud-based applications As the human element plays a crucial role in traditional financial advisory, advanced technology has not been given a greater importance
Cost Advisory fees are relatively lower and some of the Robo advisor accounts can be set for free. Hence, Robo advisory is a low-cost service Human financial advisors are relatively expensive and fees are collected as a percentage of assets under management.
Convenience Automated, digital, quick, and convenient to operate. Automation makes it easy for the investor. May require an initial consultation and several meetings to get to know each other
Investment amount Some of the Robo advisors have no minimum limit set for investment amount to start the portfolio. Even if there is a requirement, it is minimal. Human advisors set quite a high limit on the investment amount to create a portfolio and to provide advisory service for it.

 

Both the advisors have their own advantages and limitations. Suitability may vary depending on investors’ preferences.

If automation can make investing easy for young professionals, Robo advisors are the best choice.

However, human advisors are the best for specialized and unique advisory needs.

 

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#6

How Do I Choose Best Robo Advisor?

Robo advisors are rapidly expanding and making their place strong in the investment management and financial advisory industry.

Many wealth advisory startups registered as Robo advisors with the Securities and Exchange Board of India (SEBI) are making financial advisory accessible and affordable for the masses

 

Robo advisors are shining over traditional financial advisors with their unique offerings and benefits like low-cost, minimal investment, and operational ease.

Financial advisory services which were once only available for wealthy investors are now made available to every investor with a Robo trading system. 

Robo investing offers services like automated and personalized asset allocation, portfolio rebalancing and digital tax-loss harvesting, etc.

Robo advisors are a great choice for young professionals and investing beginners with limited knowledge of the market.

The type of Robo advisors ranges from complete automation-based advisory to hybrid advisory (mix of digital advisory and human advisory).

With the increasing competition, choosing the best Robo investor for you is a challenging task.

If you decide to opt for Robo advisors to manage your hard-earned money, the first thing to do is to decide the online advisor who is best suitable for you.

To narrow down the best Robo investors list and choose the best suitable one, you need to consider a few criteria.

 

Criteria to Choose Best Robo Advisor

Following are the criteria to consider while choosing the best Robo advisors

 

1. Usability

The user-friendliness of Robo trading software is important for investors. The operational ease of the Robo trading system can save you time and optimize your investment returns.

 

2. Service Offerings

Some of the service offerings by best Robo advisors such as goal-based asset allocation, automated portfolio rebalancing, investment recommendations based on risk appetite and tax-loss harvesting, etc. are important considerations while selecting the Robo advisor suitable for your investing needs.

Advanced financial advisory options offered by Robo advisors can optimize your investment returns and make up for cost differential.

 

3. Cost

Usually, advisory fees charged by the Robo advisor range from 0.20% to 0.70% of the assets under management. The cost of Robo advisors varies depending on the type of Robo advisors you choose depending on your investment preferences.

If you have a small amount to invest, you might even consider opting for free Robo advisors. Ultimately, the cost of advisory has a direct impact on best Robo advisor returns. Hence, the cost is an important criterion to consider while choosing a Robo advisor

 

 

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4. Minimum Investment Requirement

The minimum investment requirement is a key criterion for the selection of Robo advisors. There are free Robo advisors who require no minimum investment requirement for opening a Robo advisor account.

Unlike traditional financial advisors, most of the Robo advisors do not require a higher initial amount of investment requirement. If you are an investing beginner, account minimums are an important consideration.

 

5. Advisory quality

Advisory quality needs to be taken into consideration while choosing a Robo advisor. You need to opt for a Robo advisor who can provide you with quality advisory services to address your long-term investment needs.

Don’t fall prey to freebies, attractive discounts and other service offers that do not meet your investment needs. Opt for a Robo advisor who can provide you with research-backed and unbiased advisory services.

 

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Simple Steps to Find the Best Robo Investor

 

Step 1: Understand your investment needs

Financial planning requirements vary from investor to investor. Some of you may need only simple goal-based financial planning and some may need more extensive and comprehensive financial planning. You need to first understand what is your financial planning requirement.

Do you need a financial planner for only planning investments to reach your certain financial goals? Or do you need a financial planner to assist you throughout your financial journey in every aspect like investment, insurance, and taxation, etc.?

Understanding your need plays an important role in the selection of a Robo advisor. Robo advisors come in many types. If you need an advisor for goal-based financial planning, a Robo advisor that offers complete automation would be the best choice for you.

If you need an advisor for comprehensive wealth planning, then you have to go for Robo advisors who provide advanced financial planning services. These Robo advisors provide hybrid advisory solutions that are the combination of automated trading bots and certified financial planners (human intervention). 

 

Step 2: Identify and list down the best Robo advisors

Once you understand your financial needs and what type of Robo advisors you need to look for, listing down the best Robo advisors becomes easy. It is important to ensure that the Robo advisors you choose are registered with the Securities and Exchange Board of India (SEBI).

Guidelines laid out by SEBI ensure registered advisors work in the best interest of investors. Identify the Robo advisors who have a good reputation in the financial advisory market and list down the best Robo advisors that match your investment needs.

 

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Step 3: Evaluate them based on important criteria

Evaluate the best Robo advisors you have listed down based on some of the important criteria such as user-friendliness, cost-effectiveness, account minimums, service offerings, and the quality of advisory.

Before you subscribe to Robo advisory services, it is important to be sure that the Robo advisor chosen is best suitable for your investment needs. Hence, evaluating the Robo advisor plays an important role in the selection of the best Robo Advisors.

 

Step 4: Opt for a free trial and choose the best suitable Robo advisor

Most of the wealth advisory startups who offer Robo advisory services provide free trials of their online advisory services. Experience the convenience offered by the Robo trading software.

Explore the services offered on the automated investing platform before you choose the best suitable Robo advisor for you.

Though every Robo advisor promises to offer automated advisory services in the most convenient manner, there could be a possibility of facing a technical glitch. Taking a free trial helps you understand how smoothly the Robo advisor software performs.

Understand all the service offerings by the Robo advisor and choose the best suitable one for your investment need after experiencing the platform. Robo advisors are a great alternative to traditional investment advisors, especially for young investors.

 

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#7

Limitations of Robo Trading

Robo trading or Robo advisor is a new-age financial advisory service that is gaining popularity among technology-savvy investors.

Robo advisors are computer program-based digital advisory services that offer effective investment management based on your preferences.

Basically, Robo advisors are for young investors or investing beginners who are looking to invest a small amount of corpus in diversified assets at a lower cost.

When you opt for Robo advisors, your investments are managed digitally through mathematical algorithms. Robo advisor decides asset allocation suitable for your financial need based on the inputs provided by you in the questionnaire.

Choosing the right assets is a cumbersome task if it is not automated. Though Robo advisors are going to be a large part of the financial advisory industry in the future digital era, Robo advisors are not for everyone.

It is not a ‘one-size-fits-all’ model. Along with advantages of automation, operational ease, service offerings, and cost-effectiveness, there is also a certain limitation to the Robo trading system.

Keeping aside technological sophistication, let’s understand the limitations of Robo trading.

 

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Limitations of Robo advisors

 

1. Robo advisors are not completely personalized

Robo advisors come in different types. Some of the free Robo advisors provide completely automated and goal-based investment advisory solutions.

Goal-based Robo advisors follow modern portfolio theory that invests based on optimized indexed investment strategy.

This means, Robo advisors, invest in low-cost funds like index funds and exchange-traded funds. Some of the Robo advisors provide hybrid financial advisory solutions that include human assistance (financial experts) along with automated financial advice.

Regardless of the type, Robo advisors cannot provide you with completely personalized investment advice.

They can only create a portfolio based on your personal preference and financial needs. Robo advisors cannot sense what is going on in an investor’s mind and cannot understand your views on a particular investment decision.

 

2. Not all Robo advisors are cost-effective

Generally, most Robo advisors are cost-effective, but not all. It is also true that traditional human financial advisors are all expensive who would charge you more than 1% of your asset under management as fees.

However, if the financial advice offered by Robo advisors is not customized and not completely personalized, it will have a direct impact on the optimization of investment returns.

Let’s say you suffer a loss and you would like to sit and discuss changing the entire portfolio mix.

Can you do that with Robo advisors? No! If the returns are not optimized, the cost differential would not be of great benefit.

Robo advisors cannot customize your portfolio based on your life events, change in situations, and needs. Comparison of cost and benefits is a crucial element when it comes to optimizing portfolio return.

 

3. Lack of human element

Many young investors believe that Robo advisors take the ‘emotion’ out of investing which helps in optimizing investment returns at a lower cost than that of traditional human financial advisors.

However, advanced algorithms and artificial intelligence are still distant goals that could highly improvise Robo advisors.

The human element is one of the major lacks in Robo advisory. A human financial advisor gives you emotional support during a market downturn, educates you, and makes you understand every situation.

Human advisors explain to you how the financial market works and give you handholding support throughout your financial journey.

There are some unique needs and complex investment strategies which go beyond computer programs or algorithms. An only human advisor can provide such services.

If you believe financial planning requires relationship building with a financial advisor and you expect an emotional response from your advisor, then Robo advisors are not for you!

Relationship building requires you to have face-to-face meetings with a financial advisor which can definitely play a crucial role in long-term financial planning.

 

 

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4. Robo advisors lack the ability to provide holistic financial planning solutions

Though Robo advisors can provide you with automated investment advice, they cannot offer you complex financial planning solutions.

Holistic financial planning solution includes estate planning, tax planning, insurance planning, need-based investment management, budgeting, and debt reconstruction and payout strategies, etc.

The holistic approach is extremely important for wealthy investors. Robo advisors have to become even more sophisticated and more inclusive for wealthy investors.

 

5. Automated portfolio rebalancing may not be a great solution all the time

Robo advisors automate portfolio rebalancing depending on the inputs given by you. From the questionnaire, the Robo advisor assesses your investment needs, understands your risk appetite and time horizon, and then the Robo advisor decides asset allocation to construct your investment portfolio.

For example, let’s say target asset allocation is 70% in equity and 30% in debt. Whenever there is a slight change in this asset mix, the Robo advisor takes the action of selling the overperforming assets and buying the underperforming assets to get back the target asset mix on track.

Frequent rebalancing of your investment portfolio by Robo advisor may not be a good call always. This can have tax implications and lead to extra costs.

 

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Though Robo advisors are the financial advisors of the future due to increased demand for automation in every aspect of life, it completely depends on you to choose the right type of investment guide for your financial life. In certain aspects, Robo advisors can never replace human advisors.

There are limitations to each financial advisory model. Depending on your investment preference and money management requirements, you can figure out whether you should go for Robo advisors or human advisors. 

Keeping aside some of the limitations, Robo advisors can offer novice investors great cost-effective and sensible financial planning solutions. Ease, efficiency, investing discipline, and continuous evolution of Robo advisors make them shine.

 

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#9

What is Algo Trading?

The focus of digitalization and advanced technologies has been transforming the financial services industry. The use of algorithms is a great revolution in the financial industry to make high-risk decisions and to offer service efficiency to its customers.

Algorithms have now changed the way you trade in the stock market. Especially, the global pandemic situation in the past years has opened up many opportunities and made investors realize the importance of effective investing.

Young traders are relying on the new-age technology-based trading methods instead of traditional trading methods. One such new-age trading method is algorithmic trading or simply known as Algo trading.

 

Brief History and Evolution of Algo Trading

Computerized High-Frequency Trading (HFT) was first introduced by the U.S Securities and Exchange Commission (SEC) which gained popularity because of its high-speed execution of the trade.

High-Frequency Trading was improvised over years. Later in 2011, nano trading technology was introduced that helped to execute the trade within a nanosecond. This is how algorithmic trading was evolved over the years.

Algo trading was also introduced and authorized by the Securities and Exchange Board of India (SEBI) in the year 2008.

India opened its market for algo trading through Direct Market Access (DMA). This was initially allowed only for institutional investors.

However, with the speed of trade execution and its effectiveness, the exchanges, and the trading community has welcomed algo trading in India.

Benefits of algo trading like automation, mitigation of glitches, elimination of human emotions from trade decisions, flexibility, convenience, high-speed execution of the trade, safety, and thorough market research and past data analysis, etc.

Let’s understand more about algo trading.

 

What is Algo Trading?

Algo trading or algorithmic trading is an automated trading platform or process that uses pre-programmed buy or sell instructions to execute the trade order as per the specifications of the trader.

Traders or investors use automated trading software to input the trading instructions based on certain parameters like trade volume, trade time, and price.

As soon as the instruction set on the algo trading platform gets triggered, the trade order gets executed by the algo trading software.

Generally, Insurance companies, asset management companies, banks, and other financial services companies use algorithmic trading to place the high-volume trade transactions which are difficult to do manually.

Especially for high-volume traders, the algo trading platform offers trading transparency, mitigation of human error, and a great user experience.

Algo trading, which is also known as black-box trading eliminates the impact of human emotions on buying and selling of stocks. 

Algo trading platform works on the basis of computer programs or mathematical algorithms that uses past data, historic patterns in the financial market along the pre-specified instructions given by the trader to execute the trade order to reach the goal.

That means algorithmic trading software instructs the stockbroker to sell or buy a certain pre-specified quantity of stocks within a particular time if they touch a target price.

Algorithmic trading software executes the trade based on the pre-programmed instructions and submits it to the stock exchange, which intensifies the speed of trade execution and reduces manual intervention.

The amount of trade executed by algo trading software and the speed at which the profit generation is done effectively without any glitches is impossible for any human trader to do.

Algo trading is a systematic trading process that creates good profit opportunities for the investor or trader by eliminating the impact of human emotions and trade errors.

Basically, algo trading is an effective way for high-volume trades where manual intervention is quite difficult.

Traders can conveniently let go of monitoring stock prices live in the financial market and manual tracking of each progress in the market closely.

Algorithms or computer programs based on which the algo trading software works identify the trading opportunities and automate the trade to optimize the profit.

Algo trading software ensures your trades are executed at the best possible or optimal price. It also ensures accuracy and transparency in the trading process. Automation also makes trading cost-effective for you.

High volume trades are carried out at a rapid speed with complete automation on algo trading platform.

 

Risk Management in Algo Trading

Algo trading is an automated trading process. Hence, many fear the risk and management of risk. It is important to know that the back-testing of trade strategies can be done in algo trading which helps in risk management.

Strategies can be tested with real-time data without the execution of trade on the exchange to understand the effectiveness of the trading strategy. Traders can deploy the strategy after testing it.

Though benefits outweigh the risk in algo trading system, there is still a certain limitation to the system such as technology glitch.

With the advanced science, continuous advancement in the machine learning and artificial intelligence space would revolutionize algo trading system in the world. 

 

Usage of Algo trading 

Nowadays, algo trading is used in almost every type of investing and trading activity. 

 

1. Short-term trading activities: Short-term traders, arbitrages, speculators and brokerage houses can make use of the automation benefit offered by the algo trading platform. Algo trading system creates liquidity in the financial market for sellers.

2. Long-term investing activities: Mid to long-term investors, insurance companies, pension fund firms, and asset management companies who invest in bulk can execute high-volume buy or selling of shares without highly influencing the market prices of those shares with their large-volume transactions.

3. Systematic trading activities: Systematic traders like hedge funds and trend followers can program their trading instructions and strategies using algorithmic trading software more effectively and efficiently. 

Though it’s a challenging task to make the right trading strategies, execute the trade effectively on algo trading platform, the entire process of trading is made smooth, easy, and simple with the algo trading software.

#10

How Does a Algo Trading Work?

Algo trading or algorithmic trading is a trading system that involves the usage of advanced computer programs and mathematical algorithms to drive the buy and sell of shares in the financial market.

In an algorithmic trading system, trade is facilitated in huge volumes at higher speeds without any human intervention.

The specific set of pre-defined trading instructions is fed to the algo trading software based on which the trade is executed as and when the set rules are met.

Algorithms analyses the market based on the historic data identifies liquidity opportunities for the sellers in the financial market and makes a trading decision as per the clearly set instructions to optimize the profit.

An algorithmic trading system not only improves profit-earning potential but also saves time and cost. Let’s understand how algo trading works and what are the components of algo trading.

 

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Components of Algorithmic Trading

Following are the four main components of the algorithmic trading system. Let’s briefly know each of them.

 

 

1. Algorithms

Algorithms are basically the set of rules that are followed to solve problems. Set of instructions that are fed into the computer to accomplish a particular task by processing the data.

In the case of algo trading, a computer program processes the data, identifies the trend and profitable opportunities in the market based on the pre-defined instructions, and then executes the trade.

The main benefit of algorithms is the faster execution of a trade, higher-level accuracy, cost reduction, and elimination of human error. And these features have gained tremendous popularity for the algo investing system.

 

2. Computer Program

The programmer develops the algorithms based on which the algorithmic trading platform works. Algo trading software executes the trade as per the computer program developed by the programmer and as per the instructions of the algo trader.

As and when the specific instructions or limits that are pre-defined by the algo-trader are reached, automatically trade gets executed by the algorithmic trading software.

 

3. Back-testing

Algo trading also comes with a back-testing facility. Backtesting refers to the testing of strategies that are developed by the algo-trader or the programs that are developed by the programmer to know whether the particular strategy can deliver the expected result and accomplish the task or not.

Backtesting is carried out based on the historic data of the financial market before the strategies are implemented in the live market trades. With back-testing, risks in the strategy can be understood and be managed accordingly.

 

4. Technical analysis

Technical analysis refers to the dynamic assessment of the financial market conditions. This involves the study of price movements and market trends.

Various methods of technical analysis such as the moving-average method and technical oscillators and other indicators can be developed as mathematical algorithms to use for algo trading.

Based on this computer programs are developed to execute the trade in the financial market using algo trading software.

 

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Algorithmic Trading Explained

Now that we know the components of the algo trading system, let’s understand how algo trading works. Let’s understand the process of algo investing with an example.

Let’s say an algo trader has developed a trading strategy that follows below two trading instructions to execute the trade:

  • Buy 100 quantities of a particular stock, when its 50-day moving average goes above the 100-day moving average.
  • Sell 100 quantities of a particular stock, when its 50-day moving average goes below the 100-day moving average

 

These simple instructions are developed as algorithms. Programmers hired by the trader can develop a computer program or a code to perform these two above trade instructions.

A developed computer program can analyze the live price movements in the market, understand the market trend and execute the transaction once the limits are reached.

 

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Algorithms not only assess the financial market but also save time and cost for traders. In the above example, a buy transaction of 100 quantity of shares is executed as and when the stock 50-day moving average price goes above its 100-day moving average price.

Similarly, the transaction of selling 100 quantities of stocks is executed when its 50-day moving average price goes below the 100-day moving average price. Instruction fed to the algo trading software triggers the trade transaction.

The working of algorithmic trading software is explained in a pictorial representation below:

 

Algo trading or algo investing is used by institutional investors, hedge funds, and high-net-worth investors and traders in India.

Algo trading helps to execute the large trades at ease. As the entire trade process is automated, multiple market conditions are assessed simultaneously and instantly.

Algo trading ensures reduced cost, efficient execution of trade and systematically. On the algo trading platform, high-volume trades are executed at the best possible price. Backtesting of trade strategies ensures great management of risk.

Apart from the great benefit of automation, algo trading poses certain challenges and risks such as network errors, technological glitches, and time lags, etc.

The trader needs to understand the risks and challenges involved in algo trading and do stringent back-testing for complex algo trading strategies.

In recent years, do-it-yourself algo trading is also gaining tremendous popularity. There are many best algo trading platforms in India that use multiple algo trading strategies to deliver high-speed trade execution at the best possible price to help the traders.

The efficiency and the performance of the algo trading platform rely on its trading accuracy and the speed of execution.

It is important to select the best algo trading platform to get customized services and effective results.

 

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#11

Advantages of Algo Trading & Investing

Algorithmic trading which is also known as algo trading or black-box trading is an automated trading system that works on the basis of algorithms.

Computer programs or algorithms are designed to follow a predefined set of rules or instructions to execute the trade at the best possible price to generate profit.

The trade instruction is set based on stock quantity, price, timing, and other mathematical models.

The execution of trade on the algo trading platform is done at high speed efficiently which manual trades cannot match with.

In an algorithmic trading system, a trader hires a programmer to develop a computer program that can monitor live prices and trends in the financial market and assess the market thoroughly and then execute the trade based on the instruction in a most efficient manner without human intervention.

Algorithmic trading offers various advantages that have gained a lot of popularity for this automated trading system.

 

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Advantages of Algo Trading

Algo trading software executes the trade in algorithmic trading. Let’s take a look at some of the important benefits of algorithmic trading.

 

1. Reduced cost of transactions

The trader has to incur the cost of developing a computer program that can carry out high-volume trades in large numbers.

Algorithms in an algorithmic trading software identify the profit opportunities and execute the trade automatically, the speed at which algorithmic trading is executed in less than a fraction of a second.

Reduced time to execute the trade, lesser supervision, systematic manner of trade, and no manual execution of trade reduce the transaction cost.

 

2. Mitigation of manual error risk

The algorithmic trading system is an automated trading system that involves no manual interference during the process of trade execution.

Unlike manual trade, where human errors are common, algo trading reduces the risk of manual error risk.

Even though trading strategies for algorithmic trading are developed by humans, the viability of the trading strategies is tested using back-testing technology.

Back-testing, in an algo trading system, tests out the trading strategy based on the historic data and as well as real-time market data without executing the real trade in the financial market. 

 

3. Convenient and accurate

Because of the convenience and the accuracy that it offers, algorithmic trading is the most preferred way of trade execution today for many high-volume trades including insurance companies, hedge funds, asset management companies, and banks, etc.

It enables more accurate and speedy trade practices. As it involves no manual execution of the trade, high-volume trades can be executed at the desired market-level conveniently with an automated, pre-specified set of instructions or algorithms.

As the algorithmic trading process reduces manual-based obstacles and the impact of human emotions, the trades executed are more accurate. Algorithmic trading works on pre-specified instructions.

 

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4. Trade execution at best price

As the algo trading system executes the trade instantly and accurately, the trade gets executed at the best possible price.

For example, the trade (sell transaction) is set to execute at a level when the 100-days moving average goes below the 200-day moving average of a particular stock.

Then, as soon as the set instruction is triggered, the immediate trade gets executed before there is any change in price.

Hence, algo trading gives you an advantage of trade execution at the best possible price.

 

5. Reduced human intervention

In algorithmic trading, trade is not executed by the trader but by the computer program that works based on the set of instructions.

Trade gets automatically executed when the said instruction is met in the financial market.

There are no human emotions such as greed, fear or excitement, etc. involved in the trading decisions. The decision of trade execution is based on tested trading strategies that are fed to the algorithmic trading software.

In a manual trade, whenever there is an upward movement of stock price, traders may wait out of greed and not execute the trade at the desired level.

But, in algorithmic trading, trade transactions are purely executed on the basis of logic. There is no holding back out of greed or fear.

Hence, you can expect better management of risk and better returns due to reduced human intervention.

 

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6. High level of efficiency

When it comes to execution speed and saving of time, algorithmic trading is the best as it monitors the financial market, identifies opportunities, and executes the trade simultaneously in multiple markets.

An algorithmic trading system executes the trade based on a thorough assessment of market trends and changing financial market conditions. Hence, algo trading is highly efficient.

Algo trading is a new and fastest evolving trade method due to the multiple benefits that it offers. With the incredible feature of automation and technology-based functionalities, the algo trading system improves trade performance and earning potential of the trader.

Because of the speed, ability to execute large volume trades, cost-effectiveness, efficiency, and accuracy many financial institutions like fund houses, broking houses, and banks are employing algorithms for trade.

Especially in the times of global pandemic, algo trading has changed the way trade takes place in the financial market as even retail traders are now inclined towards the algorithmic trading platforms.

The algorithmic trading software makes logical trade decisions driven by computational and technological resources.

Various trading strategies can be fed to algorithmic trading software which can assess multiple market conditions simultaneously and take the decision based on the buy/sell signals indicated by the trading strategies.

The favourability of trading strategies is always tested in the algo trading system. Algo trading requires no continuous supervision and no monitoring of financial market conditions manually.

In the coming future, the algorithmic trading system is definitely going to change the way you transact in the financial market.

Algo trading will revolutionize the trading space in the financial industry. Though there are limitations or cons in the algo trading system, the advantages of algo trading outweigh the limitations of algo trading.

The share of algo trading in the financial industry is expected to grow many folds in the coming days.

 

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#12

Types of Algo Trading & Investing

Algo trading is an automated trading method in which trade orders are executed based on the set of instructions by algorithmic trading software.

An algorithmic trading platform involves no human intervention and facilitates efficient and speedy execution of a large amount of trade.

Algo investing or trading is widely used by mutual fund houses, insurance companies, pension funds, hedge funds, and other financial institutions that require an automated trading process for high-volume traders.

Algo trading works based on various trading strategies. Let’s understand various types of algo trading strategies.

 

1. Trend identification strategies

Trend following or trend identification strategy is one of the most common trade strategies followed by algo traders.

This algorithmic trading strategy follows trends in price movement, moving average, volume level change, oscillators, and other technical indicators.

These strategies can be easily executed through algorithms or computer programs. Trend identification strategies do not work on the basis of prediction analysis.

For example, if the trade has to be executed based on a 200-day moving average or a 50-day moving average, it’s quite direct and there is no price prediction to be done.

As there are no complexities, trend identification strategies are widely followed in algorithmic trading. Algo traders can rely on any of the technical indicators for their trend identification strategy depending on their comfort.

This strategy helps in identifying the trend or finding out the early reversal of the trend.

Algo trading also allows traders to use multiple trend-following strategies, which is quite difficult to do in the case of manual trading.

For example, let’s say there are 10 different strategies for a stock. Out of 10 strategies, 8 strategies give a sell signal then the system automatically goes with the majority and sells the stock.

 

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2. Mathematical model-based strategies

Algo trading follows many mathematical model-based strategies. To name, a delta-neutral trading strategy is one of the well-known and proven mathematical model-based trading strategies.

Delta refers to a change in the price of derivatives in respect of a change in the price of an underlying security or asset.

Delta neutral is a strategy that offsets positive and negative deltas by utilizing multiple positions.

In the case of the delta-neutral portfolios, market movements will have no impact and this portfolio is highly difficult to manage manually.

However, due to automation delta-neutral trading strategy can be easily applied on an algo trading platform.

In an algo trading software, you will be updated with the current position at each second.

 

3. Arbitrage trading strategies

Arbitrage trading refers to buying a stock listed on one stock exchange at a lower price and selling the same stock listed on another market at a higher price to earn profit from the price differential.

The same can be done with future instruments by making use of arbitrage opportunities.

It is quite easy to develop computer programs and implement algorithms to make use of arbitrage opportunities in the market for dual-listed stock or future instruments.

The algorithm of an algo trading software identifies the price differentials and executes the trade efficiently to earn profit.

 

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3. Position management trading strategy

An investor needs to be good at managing his position while trading under various circumstances to be a successful investor or trader.

Hence, position management plays a key role in trading success. Usually, position sizing is influenced by human emotions like fear and greed.

Algo trading makes it easy for traders to employ a position sizing strategy for algorithmic trading as systems do not have any emotion to influence the position sizing.

In an algo trading system, position management will be completely based on the predefined instructions of the algo trader and not based on his emotions at the time of the trade.

For example, if your instruction is to buy only shares worth INR 2 lakhs, the system will adjust the number of shares based on the price which would equal up the volume of trade to INR 2 lakhs.

That means if the share price is INR 100, the algo trading system will buy 2000 shares only.

If the share price is 500, the algo trading system will buy 400 shares only. This is how the position sizing strategy works on the algo trading platform.

 

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4. Stop-loss strategy

When you are investing or trading in a stock market, along with earning profit it is also important to work on protecting the profit by managing your portfolio correctly. One of the best ways to do this is by employing a stop-loss strategy in your trading practice.

Stop-loss strategy can be applied based on various parameters, which is quite easy only on an algorithmic trading platform.

In today’s volatile market condition, algo trading can help you manage risk through easy execution of stop-loss strategy on large volume trades.

Let’s say, if you set a stop-loss order for 3% below the price at which you bought a stock, then the system will limit your losses to 3%.

That means, if you bought a stock at INR 100, your share will be sold at the prevailing price at the market if the stock price falls below INR 97 (100-3).

On the algo trading platform, trade is executed automatically for bulk quantities efficiently and effectively.

There is a wide range of trading strategies that can be implemented through algorithms on the algo trading platform. Algo trading helps you execute many trading strategies with ease and in an effective manner.

As there is also a way to test the trading strategies based on the historical market data, risk if any can be managed on time.

Though most of the trading strategies which are difficult to apply in manual trading can be executed easily on an algo trading platform, it requires algo trader to hire a programmer with advanced computer programming knowledge and with good pre-made trading software to execute the trade.

The risk and challenges on the algo trading platform need to be well managed for optimization of profit.

 

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#13

Algo Trading vs Tradition Trading

Algorithmic trading and traditional trading are two contrasting trading methods. Tradition trading or manual trading is a long-practiced method of trading.

Algorithmic trading is a new-age trading method that is evolving for the better day by day. Increasing forex algorithmic trading has raised a debate over these two trading methods – algo trading and traditional trading.

We cannot say one is better than the other as both the trading methods have their own advantages and limitations.

Algo Trading

Algorithmic trading is an automated trading process that works on the basis of a pre-defined set of instructions developed as algorithms for the execution of the trade.

It is a systematic, efficient and disciplined method of trading that can execute high-volume trades in seconds. 

In trading, one of the major challenges is sticking to the trading plan and being disciplined. Automatic trading helps you do both.

In algorithmic trading, trade is not executed by the trader but by the computer program. And computer programs cannot make mistakes at the time of execution of the trade.

This means computer programs would go by pre-set instructions based on trading strategies.

It would buy a stock whenever there is a buy signal by the majority of the trading strategies and it would sell a stock whenever there is a sell signal by the majority of the trading strategies.

Unlike human traders involved in manual trading, robot or computer program in an algorithmic trading system would not enter the wrong quantity or do any other trade execution mistake. Algorithmic trading eliminates human error in the trade process. 

Unlike manual trading, an algorithmic trading system has the capacity to take a higher load of data required to make trade decisions.

As artificial intelligence has taken over most of the manual activities, algorithmic trading is gaining more popularity. Algo trading offers accurate and speedy execution of a trade.

An algorithmic trading system works on algorithms that assess the financial market and the trends, situations in multiple financial markets simultaneously.

There is no emotional involvement in the trade that takes place on the algorithmic trading platforms.

Algorithmic trading does not require you to continuously monitor the market and does not require your all-time attention.

Specifically, you have the benefit of efficient execution of trade with a lot of information assessed by the algorithmic trading system if you are an inexperienced trader. 

 

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Tradition Trading

Traditionally, before the eighties, the stock market has been managed manually. In manual trading, the trader does extensive market research and executes the trade by himself.

Unlike algo trading that works on a pre-defined set of instructions, manual trading considers the unexpected changes in the market to make changes in the execution of the trade. Manual trading is an instructive method for traders.

In traditional trading, a trader needs to stay on top of the financial market news and be updated about the market trends, price movements, and the latest developments in the market.

Technical analysis of the stock needs to be done manually in traditional trading. As you take decisions manually, traditional trading allows you to change strategies depending on the changing market situations. 

 

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Let’s take a look at some of the key differences between algorithmic trading and traditional trading

 

Algo Trading Tradition trading
Algo trading is unbeatable when it comes to trade execution speed and accuracy. Traditional trading is a manual trading method followed by the existence of the stock market. Hence, speed cannot be compared to an automated trading process that executes a trade in seconds.
Algorithmic trading software simplifies all complex calculations of technical analysis of the stock while making trade decisions. Tradition trading involves manual calculation while analyzing the stock market and a particular stock for trade.
In the case of an algo trading system, a computer program makes extensive research of the market before making trade decisions. The robot has the capacity to carry out extensive research in no time and identify opportunities in multiple market conditions. In the case of traditional trading, everything is manually done by the trader. A trader needs to do extensive research of the market manually before making any trade decisions.
Algo trading works on algorithms that follow a pre-defined set of rules by the trader. Algorithms are designed based on the trading strategies that the trader is comfortable with. There is no need to keep a constant check on the market. Trade decisions are exclusively taken by the trader in traditional trading without any automated instructions. A trader needs to be updated about the market conditions constantly to make good trade decisions. 
There is minimal human intervention as algo trading is completely automated. There is no automation and everything is manual in traditional trading.
Algorithmic trading is not influenced by human emotions such as greed and fear Manual trading is completely driven by human emotions like greed, fear, and excitement.
Algorithmic trading ensures good and smooth execution of the trade. However, technology glitches cannot be avoided Manual trading has a tendency to get impacted by human errors.
An algorithmic trading system manages risk in the right way by back-testing trading strategies before implementation. Back-testing of the trading strategy is done based on the historic data or on real-time data to understand the viability of the trading strategy chosen to be fed to algorithmic trading software. You can do thorough research and study which is time-consuming to understand the viability of your chosen trading strategy
Algorithmic trading is suitable for high volume trades carried out by financial institutions, insurance companies, mutual fund houses, pension funds and hedge funds etc. Tradition trading is suitable for experienced traders who do not trade in large volumes such as retail traders.
Algorithmic trading involved relatively lesser cost Tradition trading involves slightly higher costs.

 

After understanding the pros and cons of both the trading methods, you should choose the suitable trading method for you depending on your financial needs, trading profile, and the time that you have for trading and investing.

As the trading space in the financial market is evolving, new methods of trades are gaining more popularity. We need to make a rational decision based on our specific needs.

 

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#14

How Do I Choose Best Algo Advisor?

The Digital revolution has impacted each and every space of the financial market. With the advancement in technology, algo trading is gaining a lot of popularity.

In the financial markets of developed countries, the majority of the trade volume is generated through algorithmic trading.

Indian traders are also inclined towards a new-age, evolved methods of trading.

Though algo trading in India is mainly used by institutional investors, insurance companies, banks, pension funds, mutual funds, and hedge funds for their high-volume traders, retail traders/investors are also catching up with this newly evolved trading method.

All algo advisors work on the algorithm-based automated trading platform, choosing the best algo advisor for your investing or trading activities is a challenging task.

You need to look for some of the important features of the algorithmic trading platform. Various algo trading platforms offer a variety of services and works based on various trading strategies.

Each of the algo trading platforms can have its own pros and cons. Here are some tips to choose the best algo advisor.

 

Tips to Choose the Best Algo Advisor

When choosing the best algo advisor, you need to take into account of following factors to make the best choice.

 

1. Choice of programming languages

If you have to automate your trading strategy efficiently, you need to rely on a trading platform that is supported by the right programming languages.

Every programming language has its benefits and limitations. Some of the most commonly used computer programming languages on the trading platforms are C+, C++, Python, MATLAB and Java, etc.

Each of these programming languages fits differently on various trading platforms based on their unique pros.

For example, C++ offers an ultimate execution speed that makes it suitable for high-frequency trades.

Python has a rich library and specialized research environment which makes it more suitable for medium frequency trade.

Choose the algo advisor with the right type of programming language based on your trade requirements.

 

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2. Backtesting

If you need to execute a good trade that earns you good profit, you need to make sure that you make a great trading decision.

For that, your trade decision to be backed by extensive research and the right trading method. To increase trade profitability, backtesting is an important technique on any algo trading system.

Backtesting refers to the testing of a trading strategy or hypothesis based on historical data. By back-testing of trade strategies, you can understand the feasibility of the trading strategy.

You need to rely on the ago advisor who backtests the trading strategies on the right market segments, selects the right programming language, and selects the high-quality data for testing.

 

3. Data feeds

The different algorithmic trading platforms provide support to backtesting or trading of specific securities only.

Some of the algo trading platforms provide access to data feeds like Reuters and Bloomberg. Some algo trading platforms are specifically meant for equities trading or for forex trading in only some specific markets.

As there are so many specifications for each algo trading platform, you need to choose your algo advisor based on your individual needs.

Depending on your trade requirement, the volume of trade, and the type of trade you would like to carry out, choose the suitable algo trading platform.

 

4. Ease of Use

Ease of use is an important consideration while choosing the algo advisor. The complexity of each algorithmic trading platform varies.

Complexity may vary depending on the requirement of actual programming experts to the type of asset to be traded on that platform.

The ease of use offered to the trader needs to be considered to execute trade efficiently and effectively to make a trade profitable.

 

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5. Restrictions on the number of strategies

Algorithmic trading platforms will have restrictions on the number of trading strategies allowed on the platform. Traders might need to create additional accounts for additional trading strategies to be added.

Choose the advisor based on the number of strategies it allows you to add in each account and the additional offering of their own strategies as add-ons.

Ultimately your decision should be based on your specific trading needs.

 

6. Web-based trading platform

It is important to choose the algo advisor to have a web-based trading platform that can be accessed from anywhere conveniently.

It should allow you to do trading or back-testing anywhere by accessing the chosen algorithmic trading platform.

Though desktop trading platforms may offer more features, web-based trading platforms offer more convenience.

 

7. Service quality and technical support

As the entire trade execution depends on algorithmic trading software, you should choose an algo advisor who has an algo trading platform that has minimal technology glitches.

However, technology glitches cannot be avoided. While choosing an algo advisor, make sure you select the one with strong technical support that can instantly rectify errors, if any.

Check for the service quality of the algo trading system and the history of outages, past technical issues, etc. while choosing an algo advisor.

When having high ‘’up-time’’ is the primary requirement for algo trading, choosing an algo advisor with strong technical support and excellent quality services plays an important role.

 

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8. Cost

Last but not the least, the cost is an important consideration while choosing the best algo advisor for you. Ultimately, the cost of trade will have an impact on the profits that you earn.

Though cost is not the only factor, you need to look through the benefits and the services offered by the algo trading platform and weigh it with the cost involved to make a rational decision.

Choose the algo advisor who is suitable for your trading needs and also cost-effective.

In the coming years, algorithmic trading is going to dominate the trading space of the Indian financial market.

Choosing the best algo advisor can help you experience every benefit of algo trading to optimize your profit. Choice of algo advisor should be based on your trading needs and affordability.

 

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#15

Limitations of Algo Trading

Algo trading is an automated process of trading that works on the basis of algorithms.

Based on the trading strategies, algorithms are developed that execute the trade on the basis of pre-defined algorithms.

Algo traders back-test the trading strategies for years based on the historic data before executing the trade based on those trade strategies to understand the profitability of the strategy. 

Algo trading offers various advantages such as efficient and speedy execution of a trade, cost-effectiveness, no influence of human emotions and improved market liquidity, etc. for the traders.

Algo trading is definitely changing the way traders do transactions in the financial market.

Though algo trading is evolving and improving day by day with developments in artificial intelligence and machine learning space, there are certain limitations to this trading method also.

Let’s understand the limitations of algorithmic trading.

 

Disadvantages or limitations of algorithmic trading

Before you understand the limitation of algo trading and the challenges faced by the algo traders, it is important to know that the algo trading system is not meant for every trader or investor.

Currently, institutional investors who carry out high-volume trades, banks, hedge funds, mutual funds, pension funds, and insurance companies, etc. are employing algorithmic trading for their large volume trades.

Let’s move on to understand the limitations:

 

1. Need of advanced programming knowledge

The success of trade in an algo trading system depends on the complex algorithms developed by the programmer that is based on the trader’s strategy.

Developing such complex algorithms requires extensive and advanced knowledge of computer language and coding software such as Java, C+, C++, and Python, etc.

A financial professional may need to learn this new programming process or hire someone who is skilled technically in such processes.

As it requires a strong programming foundation and good knowledge of computer programs, the algo trading platform can get complicated for common investors or traders to use.

 

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2. Regulatory restrictions

In many countries, algo trading has been facing many regulatory hurdles. In India, the Securities and Exchange Board of India (SEBI) a regulatory body has proposed the need for creating a separate regulatory framework for algo trading.

By doing so, SEBI aims to protect retail traders and make algo trading safer. However, regulatory restrictions can make retail investors vulnerable to trade on algo trading platforms.

 

3. Dependency on technology

Incorrect algorithms can incur heavy losses to traders. Technology glitches such as lost network connection can lead to many problems in the execution of the trade. Traders may lose out on the opportunities and end up losing money.

Most of the time, technology-based problems in algo trading can trigger freak trades and become a reason for huge market crashes.

 

4. Less of human intervention

Automation is the main element of algorithmic trading. The entire process of trading is automated. There is no room to make emotion-based discretionary decisions.

If the trader feels automated trading strategy will not work in the financial market conditions that have changed unexpectedly, there is no way the trader can make a change of strategies at the time of making trade decisions.

The human trader has no control to drop the trading strategy and change it at the end moment.

 

5. Over-optimization risk

Trading strategies that you formulate manually may not come out effective when it is executed through algorithms on the live trading platform.

Manually formed strategies that are back-tested based on the historical data may not result in a successful trade on algorithmic trading platforms as soon as the live trade takes place.

That means the reliability of trade strategies cannot be assured in the live market due to over-optimization. 

 

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6. High-end resource requirement

Trader in an algo trading system requires high-end resources such as expensive advanced technology, server to develop algorithms.

Though algorithmic trading helps in reducing the trade transaction cost, there is a requirement of high-end resources for feeding the data that formulate trading strategies.

 

7. The short lifespan of algorithms

In a rapidly changing financial market, the majority of algorithms do not continue to function effectively after a certain period.

As the stock market is inherently volatile, trading strategies also need to keep changing as per the changing financial market landscape.

Algorithms in algorithmic trading software are automated instructions that cannot understand the irrational financial market just as the way we human traders could analyze.

A human trader can understand and analyze irrational market behavior. Humans can also respond and change strategies according to the irrational behavior of the financial market.

On the other hand, algorithms in the algo trading system need to be fixed or reformulated as per the changing behavior of the market. Monitoring, recreation, and improving is a continuous process in the case of algo trading.

 

8. Restricted applicability of strategies

Not every trading strategy based on technical analysis cannot be automated. Some of the excellent trading strategies that work well in manual trading for retail investors may not be able to convert in the form of algorithms.

This eliminates the possibility of earning more profit and executing the trade based on a strategy that is more effective.

Though algo trading is the future of trading due to its multiple advantages for the increasingly digital world today, it is also important to be aware of the limitations and the challenges faced by the users of the algorithmic trading platforms.

However, there is continuous improvement and rapid development in the machine learning and artificial intelligence space which would reduce many of these algorithmic trading limitations in the coming years.

The major risk that is faced by the algorithmic trading system is a systemic risk that could cause a market crash and impact the financial market as a whole.

However, in the digital evolving financial market, the benefits outweigh the limitations of algo trading for high volume traders.

 

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#16

How Should You Start Your Investing with Algo Trading

In today’s digital, everyone wants to become an algo trader. Algo trading is completely automated and the algo trading system can implement your ideas developed as algorithms.

However, it is also challenging to code your ideas and make the trade profitable for you. In algo trading, trade is executed by the trading robot.

The trading robot is a computer code that is formulated based on your trading strategy. The trading robot has the ability to execute the trading transactions based on buy and sell signals triggered by your pre-set instructions.

Algo trading is an easy process. As an algo trader, you need a computer, internet connection, and programming skills to formulate your trading strategies into algorithms for the execution of a profitable trade.

Here is how you should start investing with algo trading:

Following are the process flow to start investing through algorithmic trading:

Over the last few years, there is a steep rise in algorithmic trading platforms in India. These algo trading platforms claim that they offer easy-to-do, click-away trade on their platform.

Undoubtedly, the execution speed and accuracy of the algo trading system are unmatched comparisons to the manual trading platform.

However, the entire process of algorithmic trading is quite challenging.

 

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Let’s take a look at the step-by-step process to invest in an algo trading platform.

 

1. Gain in-depth knowledge of the financial market

 

To become a successful trader (manual trading or algo trading), you need to gain in-depth knowledge of how the financial market works.

Only if you understand the financial market or financial instrument better, you can come up with feasible trading hypotheses or strategies.

As you need to compete with the rest of the participants in the financial market, stay updated and gain knowledge. 

 

2. Developing algorithmic trading strategies

The next step to execute the profitable trade is to formulate the algorithmic trading strategies. There are various algo trading strategies such as trend following strategy, statistical arbitrage strategy, delta neutral trading strategy and mean reversion strategy, etc.

You can choose any of the strategies that are comfortable for you and then develop them as algorithms for trade execution.

It is important to remember that all the strategies that you put on the paper may not be able to automate by developing an algorithm.

Developing an algorithmic trading strategy is the main challenge in an algo trading system.

In a rapidly changing market condition, developing a market prudent algorithmic trading strategies is a challenging task.

For that, you need to have advanced technical support, extensive knowledge of programming language and solid data feeds about the financial market.

Algorithmic trading strategies are designed based on various parameters such as technical analysis of the stock, fundamental analysis, economic news, statistical data and analysis, and the market microstructure, etc. 

As an algo trader, you need to formulate a trading strategy that suits your trading requirements. Consider the time commitment, trading capital, and risk profile while developing an algorithmic trading strategy.

 

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3. Backtesting of trading strategies

Backtesting refers to validating the trading strategies, checking the formulated computer programs, and understanding how the formulated strategy functions in different market conditions and asset classes based on the historical data.

However, the future is never a representation of the past. Back-tested trading strategies on the historical data may sometimes not turn out to be profitable as soon as it gets executed in the live market.

 

4. Choosing the right algo trading platform

One of the most important steps that require your attention and research time is choosing the right algo trading platform.

You need to choose the best algo advisor who is suitable for your trading requirements at an affordable cost.

You need to ensure the algo trading platform that you choose has strong technical support and great service quality so that you do not miss out on good trade opportunities.

 

5. Live execution of trade strategies

Once you know the feasibility of the trading robot through back-testing, the next step is to move to live execution of trade strategies.

The only thing that you need to do at this stage is to verify the performance of the trading robot and automated strategies similar to that of the testing period.

However, you need to be aware of the technology glitches and the ways to rectify them at the earliest to not miss out on the trade opportunities.

There has to be continuous monitoring and recreation of algorithms as and when necessary to execute trade efficiently.

Remember every algorithm formulated on some trading strategy is short-lived which needs to be reformulated based on the changing market conditions.

 

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Let’s understand with an example to trade using algorithmic trading software.

For example, let’s say you would want to buy stocks of a certain company if the stock price goes above its 100-day moving average.

If you have to do this manually, it would be really difficult to keep tracking the moving average price and the charts manually to execute the buy transaction.

But, algo trading makes this easy for you as you can automate your trading strategy. You can feed the instructions to the trading robot or algorithmic trading software.

Then, the algo trading software monitors the live financial market data and triggers buy or sell signals for a stock.

If you rely on a fully automated algo trading system, the trade will automatically get executed as soon as the buy signal triggers.

As a retail trader or an investor, you can use APIs (Application Programming Interface) offered by your broker to consume market readable data and then execute trade orders.

There are many algo traders who use third-party automation tools to fetch data and connect with the broker’s algorithmic trading platform.

If you need to be a successful algo trader, all you need to do is invest in yourself. Keep acquiring knowledge, develop a new set of skills and excel in your trading journey. 

 

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