Algo Trading in India: Basics and the Process

Algorithmic trading, often referred to as algo trading, has revolutionised the way investors approach financial markets in India. This automated trading method employs computer programs, known as algorithms, to execute trades swiftly and efficiently. 

In this guide, we will understand the real meaning of algo trading, explore its benefits, understand its fundamentals, and learn how it operates.

What is Algorithmic Trading

Algorithmic trading meaning- Algorithmic trading is the process of using computer programmes that follow predefined instructions to execute trades automatically. The instructions are based on multiple factors. These are price, time, and quantity, and they use mathematical models to guide decisions. 

The programme can place trades at very high speeds and frequencies, without human involvement. This reduces emotional decision-making and can improve profit potential, increase market liquidity, and bring more objectivity to trading.

One key objective of algo trading is to eliminate the influence of human emotions on trading decisions. This helps in more systematic and rational trading activities.

There are several algorithmic trading software options available in India, catering to various user skill levels from beginners to advanced traders.

How Algo Trading Works

Let’s walk through the simple process of how algo trading works in India. 

1. Create a Trading Strategy
A clear rule-based strategy is defined. For example, you might buy a stock when its 50-day moving average crosses above its 200-day moving average.

2. Code the Strategy
The rules are written into a computer programme using a language such as Python.

3. Connect to Market Data
The algorithm receives live price and volume data from the exchange or broker.

4. Analyse and Execute
The programme checks the data continuously. When the conditions match the rules, it sends a trade order to the exchange through the broker’s API.

5. Test and Monitor the System
Before going live, the strategy is tested on past and real-time data.

Backtesting checks how it would have performed historically.
Paper trading tests it in real time using virtual money.

6. Continuous Monitoring
Even after deployment, the system must be watched for technical issues or changes in market behaviour.

7. Risk Management
The algorithm includes protections such as stop loss levels and position size limits to control losses.

How to Do Algo Trading 

To begin with, you need an understanding of financial markets, a platform that supports automation, and a clear strategy that can be tested and refined. 

Here is a simple and structured beginner’s guide to algo trading in India-

1. Understand the Basics
Start by learning the core concepts and basic key terms of the stock market. This includes different asset classes such as stocks, options, currencies, as well as basic order types, including market and limit orders. It is also important to understand risk management because every trading decision must consider potential losses and exposure.

2. Choose a Suitable Platform and Broker
Select a reliable platform that supports algorithmic trading or a broker that offers an API for automated trading. 

Some platforms provide visual strategy builders that do not require coding, which is helpful for beginners. API based platforms offer more control but require programming knowledge.

3. Learn Programming if Needed
Although you can use no-code platforms, learning a programming language such as Python is a strong advantage. 

4. Develop a Rule-Based Trading Strategy
Create a clear set of rules that define when trades should be entered and exited, how risk will be managed, and what success means for your system. 

Some of the common strategies include trend following using indicators such as moving averages, mean reversion based on price returning to its average, and arbitrage, where temporary price differences across markets are used.

5. Backtest Your Strategy
You must always test your strategy on past market data to see how it would have performed historically. 

This prevents creating a strategy that works only on paper but not in reality.

6. Practise with Paper Trading
Before risking real money, you should run your algorithm in a simulated environment where it reacts to live market data but does not place real trades. This helps you identify programming errors, logical flaws, and unexpected outcomes without financial loss.

7. Go Live Carefully
Once you are confident in the backtesting and paper trading results, you can start with a small trading amount in live markets. Watch how the algorithm behaves in real time because market conditions change rapidly, and the system must handle these changes smoothly.

8. Monitor and Optimise Continuously
Algorithmic trading is not a set-and-forget approach. The market evolves, so your algorithm must evolve too. 

You should review logs, analyse performance, and improve the strategy where needed. Small adjustments can make a significant difference over time.

9. Use Strong Risk Management Controls
Ensure your algorithm has built-in risk protections. These include stop loss rules, take profit levels, position sizing guidelines, and maximum daily loss limits. Strong risk control protects capital and ensures disciplined decision-making.

Algorithmic Option Trading

This is often referred to as algo option trading. It is a cutting-edge approach to the options market. It involves the use of computer programs and algorithms to automate and optimise options trading strategies. 

By leveraging technology, algo option trading aims to capture profit opportunities, manage risk, and execute trades with precision in the fast-paced world of options.

Examples of Algo Platforms

AlgoTest (for Indian F&O traders)

AlgoTest is India’s best algo-trading platform that lets traders build, test, simulate, and automate trades without writing any code. Whether you’re an options seller, directional trader, indicator-based trader, or someone completely new to automated trading, AlgoTest gives you everything you need to trade with discipline and data-backed confidence.

It’s built specifically for India’s options and derivatives markets, including NIFTY, BANKNIFTY, FINNIFTY, SENSEX, and stock options, and helps you eliminate guesswork by offering accurate backtesting, realistic simulations, live automation, and an easy no-code strategy builder. 

Is Algorithmic Trading Legal in India

Algorithmic trading is legal in India, but it operates under strict rules set by the Securities and Exchange Board of India. SEBI has created a detailed framework to protect investors, ensure transparency, and maintain market stability.

Algo Trading in India and Key SEBI Regulations 

SEBI continues to manage and refine the regulatory framework for retail algorithmic trading through official circulars and regular updates.

1. Exchange Approval for Each Algo Strategy
Brokers can allow algo trading only after receiving exchange approval for every specific algo strategy.

2. Mandatory Algo ID for All Algo Orders
Every algo order must include a unique identifier known as an Algo ID, which is assigned by the exchange. This ensures proper audit trails. Brokers must tag all orders correctly and report any changes made to approved algos.

3. API Security Requirements
Brokers must block open or unsecured APIs.
API access is allowed only through unique keys, whitelisted static IP addresses, and strong authentication such as two-factor verification.

4. Broker Oversight Responsibilities
Brokers are responsible for monitoring algos, maintaining risk management systems, using kill switches for each Algo ID, and handling all client-related issues.

5. Empanelment of Algo Providers
Algo providers, including LMS or vendors, must be empanelled by the exchanges based on defined criteria before they can work with brokers. Brokers must carry out due diligence before onboarding them.

6. Threshold Orders Per Second Framework
Exchanges set Threshold Orders Per Second limits. If orders placed through APIs exceed these limits, they are treated as high-frequency algos and require specific controls and tagging.

7. Exchange Supervision Duties
Exchanges are responsible for supervising how brokers comply with the framework. This includes verifying API security, checking algo approval processes, and reviewing the empanelment of algo providers.

Popular Algo Trading Strategies and How They Work

Strategy	How It Works
Trend Following	Algorithms follow existing market trends using indicators such as moving averages or directional indicators. They enter trades when signals such as a fifty-day moving average crossing above a two-hundred-day moving average occur.
Mean Reversion	This assumes prices return to their historical average.  When the price deviates significantly from the mean using tools such as Bollinger Bands or RSI, the algorithm takes positions expecting a correction.
Arbitrage	It exploits temporary price differences for the same asset across different markets by buying at the lower price and selling at the higher price simultaneously.
Statistical Arbitrage	This method uses mathematical and statistical models to identify mispricing among related assets.  The algorithm takes long and short positions, expecting price relationships to converge.
Market Making	Continuously places buy and sell orders to provide liquidity. The profit comes from the spread between the bid and ask prices.
Index Fund Rebalancing	This strategy anticipates the changes that index funds make during scheduled rebalancing and trades ahead of these large institutional orders.

What are the Advantages and Disadvantages of Algo Trading in India

Algo Trading Benefits in India

1. Faster and More Accurate Execution
Algorithms execute trades in milliseconds, capturing quick market moves and reducing manual errors.

2. Removal of Emotional  Bias
Automated systems follow fixed rules, ensuring decisions are not influenced by fear, greed, or panic.

3. Ability to Backtest Strategies
Traders can test strategies on past data to understand performance, refine rules, and reduce risk.

4. Efficient Handling of Large Volumes
Algorithms manage many trades and multiple strategies at once, which is beyond human capacity.

5. Access to Multiple Markets
Systems can track and trade global markets around the clock, offering diversification without manual effort.

6. Lower Transaction Costs
Optimal execution and reduced slippage help lower trading costs, while automation saves time and resources.

7. Better Market Liquidity and Efficiency
Algorithmic trading increases market activity and improves price discovery through rapid, continuous trading.

Algo Trading Disadvantages

Here are some things that need to be kept in mind-

• Algo trading depends heavily on technology, and system failures can lead to losses.

• Building and maintaining algorithms requires high costs and specialised skills.

• Algorithms still need constant monitoring and cannot be left unattended.

• Complex coding and small errors can cause rapid, large-scale losses.

• Algorithms lack human judgment and cannot adapt to unexpected market events.

• Over-optimised strategies often fail in live markets despite strong backtests.

• High-frequency activity can increase market volatility and contribute to flash crashes.

• Rising competition and strict regulations reduce profitability and add compliance burden.

Conclusion

Algo trading has opened the door to faster, rule-based, and more disciplined decision-making for Indian traders. However, you must know that it still demands the right knowledge, testing, and responsibility. With SEBI strengthening its framework and brokers enforcing strict controls, you can participate safely only when you understand the risks and build strategies with care.

Algo Trading in India – FAQs

Source: https://www.sebi.gov.in/

Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.