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What is Robo Trading and How Does It Work

25 Sep 2023

Introduction:

There are several ways to earn money from the stock markets. For instance, risk-averse investors can take the delivery of stocks and then resell them at higher prices after a few months or even a few years. This is the method used by most traditional equity investors.

However, modern investors are more interested in quick profits within short durations. That is why they use different trading techniques, such as intraday and derivatives trading. These trading methods allow you to gain considerable profit with limited capital.

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However, they require a close watch on the markets as you must use daily fluctuations to make money. You must carve out specific entry/exit points with strict targets and stop losses after careful market analysis. If you miss out on these points, you can incur huge losses or let a profit-making opportunity slip.

But what if you are not available to keep a strict watch on the market during trading hours? You might have several other tasks to fulfil. A new facility, known as Robo Trading, can help you fix this problem. This article explains in detail what robo-trading is, how you can use it, and how it can help you make your intraday trading seamless.

What is intraday trading?

Intraday trading, or simply day trading, involves buying and selling stocks on the same day. The stock exchanges in India remain open from Mondays to Fridays (except for public holidays) between 9:15 AM and 3:30 PM. You can place your intraday trading orders within this 6-hour trading window.

For intraday trading, it’s mandatory to square off your active positions before the market closes. If you fail to do so, your stockbroker may automatically square off your positions or convert your intraday trades into delivery trades.

What is Robo Trading? How can it help in intraday trading?

Robo trading allows you to place two more orders while placing your first intraday order. Among these two orders, the role of the first is to ensure you make the speculated profit, and the role of the second is to protect you from incurring high losses due to erratic price swings.

Hence, robo-trading facilitates the automatic buying or selling of intraday stocks when they hit their targets or stop losses. As soon as one of the orders executes, the other one gets canceled automatically.

Below are the salient features of the robo-trading facility:

  • You can use robo-orders only for intraday trading
  • Robo trading involves a three-leg order. The first one is the initial buy or sell order, the second is the target order, and the third is the stop-loss order
  • It eliminates the need to keep a watch on the market at all times. You can place a robo-order and get back to your daily tasks
  • You can use the trailing stop loss feature to limit your losses or maximize your profits amid erratic price movements
  • It works on the principle of pre-defined logic and helps avoid the impact of human emotions on a trade
  • Allows intraday trading with greater accuracy and less effort

How does a robo-order work?

As mentioned, robo-trading involves three-leg orders. If your initial intraday order is a buy order with a long position, the other robo orders should be sell orders. On the other hand, if your initial intraday order is a sell order with a short position, the other robo orders should buy orders.

For example, suppose you initiate an intraday order by buying 1,000 shares at Rs. 200 each. With the help of the robo-trading facility, you can place two more sell orders along with your initial order. So, you place a target order for Rs. 210 and a stop loss order for Rs. 195.

Now, as soon the intraday price of the shares touches Rs. 210, your order will get squared off, and you will gain Rs. (10 x 1,000), i.e., Rs. 10,000. However, if the market declines and the stock price touches Rs. 195, your order will still get squared off, and you will incur a loss of Rs. (5 x 1,000), i.e., Rs. 5,000.

To conclude

The robo-trading facility can be a highly convenient tool for intraday trading. It eliminates the need to keep a watch on the market at all times and negates the impact of human emotions on trading outcomes. With Motilal Oswal, you can open a free Demat account and trade seamlessly in the stock markets.

 

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