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Algorithmic Trading for Retail Traders - SEBI consultation paper

This is the need of this hour, to regulate Algo Trading for retail Traders. SEBI has published an article link is mentioned below to seek suggestion from all Algo traders. 

SEBI | Consultation Paper on Algorithmic Trading by Retail Investors

Are we loosing only by doing Algo Trading: We loose while doing manual trading, we loose money by investing on Mutual fund, we loose money by taking SEBI registered trading Advisory services. Is there any rules and regulations to protect us from loosing money by the above investment options. There can never be any such rule. When we enter into stock market for making money its our responsibility to safeguard our money too. 

Yes its true weo loose money from Algo trading. The mater of fact is, as a trader we need to educate ourselves about Algo trading and about its shortcomings. Once we are aware we shall not loose in long term for sure. Algo trading is the future of trading and retail traders must be part of Algo trading. Till now HFT (High Frequency Trading) is the only Algo trading allowed by SEBI, which is out of reach from retail traders. 

Benefits of Algo Trading: The primary benefit of Algo trading is that it can search the condition in fraction of millisecond, trigger the Buy and Sell signal and execute them for hundreds of accounts in millisecond.

A highly sophisticated execution engine coupled with a robust Algorithm can execute thousands of trades within a second.

When we talk about trend following strategy, a computer program is designed in such way it never exits or squares off positions it the trend is continuing, with that in a single trade an Algo strategy can generate more than 500 points for Banknifty in a single lot.

Lets me share one latest trade of 3rd Jan 2020, it was a completely trending day, where an early entry in LongXL strategy has brought us 543 points (a return of Rs. 13,575/-) on a single trade with an investment of Rs. 12,500/-

As our main focus is for retail traders and low fund, we do not encourage any of our strategies to take multiple trade. None of our strategies takes more than one trade in a day, be it a volatile day or trending day.

Our Trend following strategies never generates trade signals every day, they shall generate signals only if the trend is confirmed by our system.

Our strategies are deigned for different type of traders, where OptionZoom works on OTM options, and LongXL works on ITM or ATM strike prices.

All in all as more and more traders are entering into Algorithmic trading, liquidity is increasing significantly, reducing the bid/ask spread in turn the transaction cost.



There are many Algo service provider in India, via different public marketplaces, where any individual can become a Algo service provider. There is no proper system to check the validity of the Algo Bots, neither it is possible.  The only way to safeguard our hard earned money is to educate ourselves as a trader. In this article I am trying to explain the Do’s and Don’ts of Algo Trading.  

A proper analysis, market research is very important prior to opt for Algo trading. 

Individual Algo creator need to know the following to ensure the developed Algo is actually profitable one.

Few Do’s prior to develop Algo Strategy: 

  1. Stock Market knowledge backed by some professional certification.
  2. Algo should have a positive Risk-Reward
  3. Winning % vs Risk reward is favorable to the investment
  4. Entry price and Exit price has no wrong calculation while generating Backtest result
  5. The algo need to run in live market and generate positive return before it is offered to retail client
  6. The Algo service provider need to run the Algos of their own in their real money from inception of the Algo
  7. Algo should never go into any infinite loop
  8. The Algo service provider should have strong technical background to understand how a program can harm and what are the risks.
  9. Algo should give positive returns after deducting Slippage and Brokerage.
  10. All Algos should have a finite Stoploss to ensure loss is restricted and there cannot be infinite loss.

Do’s as a Trader: Look for Algos which is running in the market for some time. Check if the Algos are generating positive return excluding Slippage + excluding Brokerage. Check if number of trades are less. Risk Vs reward is minimum 1:2 or more. Try to avoid Scalping based algos. 

If we talk about our strategy bots, all DTMAlgo Bots, they are time tested in live market. We run all the Bots in our own broker account with real money before publishing them for retail traders.

All strategies which are publicly available in our marketplace is set up in our accounts and we are trading on them.

All our strategies have strict Stop Loss and also have Trailing losses defined.

None of our Algo bots have even gone in infinite loop

None of our Algos have ever missed Stop loss, as we give utmost priorities on Stoploss.

Don’t as a Trader: There can be many reason behind the loss of retail Algo traders.

Do not look for maximum return, look for consistency. Do not trade on strategy which is just now launched and its live market trade history is not available.

Let me share few thoughts which we have observed over the time in real traders physiology.  Generally a good Algo Strategy has its winning and loosing trend, no Algo strategy can generate profit continuously, cause each strategy is designed for a particular market pattern. Market movement keeps on changing. Market generally takes three types of trend, Up/Down trend, which is called trending market,  market my remains in range without any specific direction, which is commonly known as range bound market. Market also may have volatility, where we see a sudden change in direction during the same day, where a strong up trend reverses with a strong down trend. 

Each strategy maker design their strategies for these different market conditions, no strategy can be profitable in all three market conditions. Some may work on trending market and some may work on range bound market or few may work well in volatile market conditions. 

As a Algo trader one need to understand the market well and choose the strategy that fits their expectation. If I choose a trend following strategy during range bound market or volatile market condition, then I am bound to loose money for some time till market again becomes trending. Hence Don’t expect a trend following strategy shall make profit on volatile or Rangebound market. 

Each Algo strategy undergoes a cycle of profit and losses, as a trader one need to understand why the strategy is generating profit and why is it looking, once that understanding is clear, making profit from algo trading becomes relatively easy. 

When a strategy generates profit we deploy more lots/quantity. By the time we increases the quantity of trade market condition changes and the strategy performance degrades, and we incur losses at higher quantity. As the loss piles up, with fear of loosing our entire investment we tent to stop Algo trade, thinking this is useless. Don’t increase your trade quantity when the strategy is making profit. If you like the strategy then wait till the strategy start making losses, once you see couple of consecutive loses increase the quantity. 

How many of trader increases the quantity when in loss, if you are such trader then you shall remain there in Algo trading in long run. Either you maintain the same quantity throughout, or if you want to increase fund, increase when strategy is in loss making phase. 

Challenges with SEBI : The question here is how can any system differentiate if any trade signal is coming from an approved Algo.  Any Algo strategy needs some change during its execution, once the algo gets approved if that stops performing as expected, the algo creator need to work on that to make it relevant, does that need to be re approved again and again? How that can be organized.

There are many individual Algo Traders, who trade on their own Algos. At an individual level each Algo trader can not approve their Algos by any approving authority considering the regulations, time and actions involved in the approval process. 

A single approved Algo can generate multiple signals, how can a system differentiate if the signal is really coming from the approved algo. API shall contain a field with approval Id or something, but the same approval ID can be used by multiple un approved Algos too. There can never be a full proof system to validate that. 

Conclusion:  Algo trading is a systematic way of trading, where we trade based on a proven strategy and continue to follow the same system. We have to maintain a discipline and have faith on the strategy, otherwise we shall end up in loss. 

Instead of focusing Algo strategy approval, SEBI need to ensure Traders are knowledgeable enough to understand what is Algo trading and what can go wrong.  We loose while doing manual trading too, and we will loose in Algo trading as well. If we are in share market we shall loose, but we need to make ourselves aware that Algo trading shall not make us rich overnight, its a process and will earn slowly and systematically. 

SEBI shall conduct Algo trading awareness sessions for traders more often, to me that is the only solution for a long live algo trading. 

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DTM Financial Solutions, is a financial solution company deals with software based trading products for Intraday and swing trading in Indian market. We are here to help Indian traders with Algo trading, AFL strategy building, and robo trading.

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