Trade with multiple stop-losses, risk limits

Securities & Exchange Board of India (Sebi) Chairman Tuhin Kanta Pandey said recently that the rise of algorithmic trading brings efficiency but also demands robust risk controls and real-time monitoring.

- HIMALI PATEL

Here isa look at the key risks retail investors face in algo trading and how they can manage them.

Myriad risks

Liquidity isa majorconcern. Many stocks and options in India are illiquid, with shallow market depth and wide bid-ask spreads. Orders may not get filled or may execute at worse than expected prices, which is called slippage. “Slippage becomes a major issue if liquidity is not factored in,” says Rajesh Ganesh, founder & chief executive officer (CEO), TripleInt Trading Systems.

Retail investors may also rely excessively on back-tested results or use poorly coded strategies.

“Lack of real-time monitoring can cause significant losses if something goes wrong,” says Vikas Singhania, chief executive officer (CEO), TradeSmart. Black-swan events can worsen losses. “Inadequate stop-loss settings can trigger rapid drawdowns,” says Harsh Vira, chief financial planner & founder, FinPro Wealth.

Don’t rely blindly on back-tested results

Back-tests often fail to reflect real-world trading. Strategies that excel in back tests often fail in live trading. “A reliable back test must include realistic costs, slippage, and drawdowns,” says Vira.