In our previous article ‘Is equity trading right for me?’, we went over how time is crucial for an intraday trader. In this article, we will elaborate on how technology has transformed trading and how you can benefit from it.
A few decades ago, trading in India was a complicated affair. Traders would have to analyse the open and close prices of the stocks in the newspaper first thing in the morning and call their brokers present on the floor of the stock exchange to place their orders. By the time the brokers received a receipt of the transaction, the price of the stock would have drastically changed. And you would not have the live feed of the price movements to track your stock through the day.
But with the internet boom, the stock exchange and SEBI have transformed the way Indians carry out trading. And brokerage firms have made full use of this revolution and brought about several technological solutions to support the decision making skills of their clients, to the point that now the focus has now shifted to the additional features a trading platform can provide, rather than basic trading functionality which is taken for granted.
Casual traders might not find themselves looking for complex trading technologies to place their orders. But full time traders trade in huge volumes across several sectors and indices. Currently, a lot of emphasis is placed on automation technologies to make trading easier for clients.
What technologies and systems should a day trader have in his/her kitty?
If we dissect and analyse the process of a trade, there are two components to it:
- Selecting a stock/index/currency pair to trade with
- Placing the order with the exchange
Technology used for selecting stocks:
You might have constructed a set of rules for selecting a stock to trade with. A few of the deciding factors could be volume, activity, its closeness to its 52 week high/low etc. But it can be hard for you to manually go through the thousands of stocks listed on the exchange and see if they match with your criteria for stock selection. This is where screeners come in. With screeners, you can script your criteria depending on the parameters you want to use, to shortlist your stocks. For example, you could script a screener which filters stocks based on whether the 20 day moving average has crossed the 50 day moving average.
Decision making and order placing:
You might either stick with stocks whose movements you are comfortable with or screen stocks based on your strategy. But in either case, you need to analyse whether the stock is rallying in an uptrend or moving in a downtrend or is in a range bound consolidation. Trading platforms allow you to perform your own analysis by giving you access to several indicators. Indicators can be used to confirm a buy or sell signal but remember that trading can be volatile and your stock could reverse its direction in a heartbeat.
After deciding on whether a stock is to be bought or sold, you have to place an order with the stock exchange. But SEBI does not allow individuals to place their orders directly with the exchange. The brokerage firm with whom you have a trading account will do that for you. The process is simple and straightforward. You need to mention the stock, quantity of the stock you want to trade with and the type or order it should be. We will cover the types of orders in detail in a different post.
Backtesting and Automation technology:
If you think you have perfected a strategy to trade with, it will be of additional help if you could backtest the same. It will give you an additional confidence boost and you can proceed with automating your system. To backtest a strategy, you will need the historical data of the stock, entry and exit rules, a scripting tool to convert your strategy into high level language. You can apply the high level code to the historical data and test the accuracy of your strategy through several years.
Automation is every traders’ dream. It allows you to sit back and let your system do all the work. With automation, you can screen the stocks according to your strategy, integrate it with your trading platform to directly place buy/sell orders and log your trades for analysis.
Technology has come a long way in making trading accessible and easy for everyone. With these latest developments in trading technologies, you can make more informed decisions.