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Advantage & Disadvantage

Advantages and Disadvantages of Algorithmic Trading

Algorithmic trading is substantially used by institutional investors and big brokerage houses to cut down on costs associated with trading. According to exploration, algorithmic trading is especially salutary for large order sizes that may comprise as important as 10 of overall trading volume.
Generally request makers use algorithmic trades to produce liquidity.
Algorithmic trading also allows for faster and easier prosecution of orders, making it seductive for exchanges. In turn, this means that dealers and investors can snappily bespeak gains off small changes in price. The scalping trading strategy generally employs algorithms because it involves rapid-fire buying and selling of securities at small price supplements.
The speed of order prosecution, an advantage in ordinary circumstances, can come a problem when several orders are executed contemporaneously without mortal intervention. The flash crash of 2010 has been criticized on algorithmic trading.
Another disadvantage of algorithmic trades is that liquidity, which is created through rapid-fire steal and sell orders, can vanish in a moment, barring the chance for dealers to benefit off price changes. It can also lead to instant loss of liquidity. Research has uncovered that algorithmic trading was a major factor in causing a loss of liquidity in currency requests after the Swiss franc discontinued its Euro cut in 2015.

Types of Algorithmic Trading

Several types of trading algorithms help investors decide whether to buy or vend. The crucial types of algos are grounded on the strategies they employ. For illustration, a mean regression algorithm examines short- term prices over the long- term average price, and if a stock goes much advanced than the normal, a dealer may vend it for a quick profit. Other algorithm strategies may vend timing, indicator fund rebalancing, or arbitrage. There are also other strategies, similar as fund rebalancing and scalping.


Arbitrage looks to take advantage of the price difference between the same asset in different requests. Algos can subsidize on this strategy by snappily assaying data and relating pricing differences, also snappily execute the buying or selling of those means to subsidize on the price difference.
An asset may trade for one price on a certain exchange, but a different price on another — the algo would subsidize by buying the asset at the lower price on one exchange and incontinently vend it for the advanced price on another exchange.

Request Timing

Request timing strategies use back testing to pretend academic trades to make a model for trading. These strategies are meant to prognosticate how an asset will perform over time. The algorithm also trades grounded on the prognosticated stylish time to buy or vend. These strategies involve numerous datasets and lots of testing.

Mean Reversion

Mean modification strategies snappily calculate the average stock price of a stock over a time period or the trading range. If the stock price is outside of the average price — grounded on standard divagation and once pointers — the algo will trade consequently. For illustration, if the stock price is below the average stock price, it might be a good trade grounded on the supposition that it'll return to its mean (e.g. rise in price). This type of strategy is popular among algos.

Algorithm Trading Illustration

The following is an illustration of an algorithm for trading. A dealer creates instructions within his automated account to vend 50 shares of a stock if the 50- day moving average goes below the 200- day moving normal. Again, the dealer could produce instructions to buy 50 shares if the 50- day moving normal of a stock rises above the 200- day moving normal. Sophisticated algorithms consider hundreds of criteria before buying or dealing securities. Computers snappily synthesize the automated account's instructions to produce the asked results. Without computers, complex trading would be time- consuming and likely insolvable.

Algorithms in Computer Science

In computer wisdom, a programmer must employ five introductory corridor of an algorithm to produce a successful program. Describe the problem in fine terms Produce the formulas and processes that produce results Input the outgrowth parameters Execute the program constantly to test its delicacy. The conclusion of the algorithm is the result given after the parameters go through the set of instructions in the program.
For fiscal algorithms, the more complex the program, the further data the software can use to make accurate assessments to buy or vend securities. Programmers test complex algorithms completely to insure the programs are without crimes. Numerous algorithms can be used for one problem; still, some simplify the process better than others.
Advantages and Disadvantages of Algos Trading, Algorithm trading has the advantages of removing the mortal element from trading, but it also comes with its disadvantages.


Maybe the biggest benefit to algorithm trading is that it takes out the mortal element. With algo trading, the emotional part of trading is annulled. The eventuality for overtrading is also reduced with computer trading — or under-trading, where dealers may get discouraged snappily if a certain strategy does n’t yield results right down. Computers can also trade briskly than humans, allowing them to acclimatize to changing requests hastily.


The big issue with algorithmic trading is that it relies on computers. Without power (electricity) or the Internet, algos do n’t work. Computer crashes can also hinder algorithmic trading. Also, while an algo- grounded strategy may perform well on paper or in simulations, there’s no guarantee it ’ll actually work in factual trading. Dealers may produce a putatively perfect model that works for once request conditions.


  • Eliminates mortal rudiments, feelings
  • Creates thickness when testing a strategy Over/ under trading reduced
  • Computers acclimatize to price and request changes hastily


  • Emotion Less’ trading, no way let your emotional backlog preemption your trading opinions.
  • Veritably High frequency trades are only possible via machine trading.
  • Possibility to manage high volume trades.
  • Manage multiple open positions.
  • Trust of ‘Back testing’, lets you stick to trading discipline.
  • Mentally prepared in loss making days with the major draw downs and back testing.
  • Largely scalable model, manages 100 of open positions at a time.
  • No matter how busy you are, you'll No way miss a trading day/ occasion.
  • Instant Square off in gap openings.
  • Assay your trades and optimize the trading plan.
  • The ‘Unborn falsehoods then’, further than 60 volumes are driven by Algorithms.


  • Does not work without electricity or the Internet
  • Can look good on paper but underperform
  • Requires lots of data, computer power, moxie, etc.