Algorithmic Trading Using Trend Following Strategy: Evidence from Indian Information Technology Stocks

Abstract

Data analytics has gained significant importance in all fields due to the continuous improvement of analytical techniques. It enables us to take complex and quality decisions by analyzing various forms of data. In the field of banking and finance, the primary application includes High-Frequency Trading (HFT), volatility assessment, liquidity management, etc. HFT has gained importance due to its feature of faster trade and high efficiency. However, algorithmic trading is the application to implement HFT. Various strategies are implemented to execute orders, depending upon market conditions. One of the strategies involved in algorithmic trading is Trend Following Strategy. In this paper, we implement Trend Following Strategy for Indian Information Technology stocks featured in NIFTY50 for FY 2019-20. Simple Moving average of stock returns at 11 and 22 days are estimated to generate the “BUY” and “SELL” call. The pairwise correlation coefficient between stock returns and its moving average at 11 and 22 days are computed to identify parameters for a better investment decision. BUY-SELL, SELL-BUY, and overall efficiency are assessed for the strategy. However, as the sample is restricted for one financial year, future research scope lies in implementing this strategy for a large number of stocks belonging to different sectors across a longer time horizon, which may cover the bullish and bearish phase of the stock market.