Algorithmic trading is a highly developed forex trading system that utilizes conceptualized formulas and numerical models to be able to offer extremely fast and successful trade decisions.
Algorithmic trading is as well referred to automated trading, black-box trading or merely algo-trading. It involves the use of a computer program to follow definite set instructions of a trade to generate profits for the trader at a rate and frequency that that is much faster than that of a human trader.
The algorithm is normally based on a set of rules that frequently designed by the traders. Examples of such defined rules include price analysis, timing, opening and closing trading structure, risk management, price, quantity or any mathematical model and a lot of other trading rules. Algo- trading increase the traders chances to making profit and in addition boosts the liquidity of the market. It also makes the market more systematic by eliminating the effect of human emotions on the trading result.
Advantages of Algorithmic Trading
Algorithmic trading offers the trader a lot of benefits and this includes the following:
- It helps the trader to execute trade at the best promising prices
- It ensures a real time and precise placement of trade order which increase the trader’s ability to execute orders at the most preferred positions.
- It helps the trader to trade rightly and immediately, to eliminate noteworthy alterations in currency prices.
- It minimizes the costs of transactions
- It enables the trader to concurrently carry out automated investigations on various market conditions
- It minimizes the risk of manual errors that could occur when placing trade orders.
- Algorithmic trading can be backtested, on accessible historical and real-time data, to verify whether or not it is a practical trading strategy
- It eliminates the possibility of errors occurring as a result of human emotions and psychology.
Category of algorithmic trading
There are four different categories of algo trading and these are the following:
- Automatic Hedging algorithmic trading
- Statistical trading algorithm
- Direct Market Access and
- Algorithmic trade execution strategies
Automatic Hedging algorithmic trading is a forex risk management strategy that generates specific rules for minimizing the trader’s market exposure to different types of risks. The aim of algorithmic trading machine is to use preset objectives which may be how to execute a specific trade fast or how to minimize the market impact.
Statistical trading algorithm
Statistical trading algorithm looks for gainful trading potentials in the financial market with the use of various set of historical data or arithmetical analysis.
Direct market access
Direct market access algorithm helps the trader to establish best possible speeds and the lower prices where a trader can have access or link with many liquidity providers at the same time.
Algorithmic trade execution
One of the most significant style of algorithmic trading is high-frequency trading, which is utilized in situations where there is an extraordinarily high rate of order execution. This can significantly benefit the trader by offering him or her chances to execute trades in milliseconds of price alterations. Nevertheless, like every other trading style, it is not without a demerit.
There are other forms of algorithmic trading and techniques including those based on financial news, arbitrage and more.
How to implement Algorithmic Trading while trading forex
Financial bodies which are the dominant factors in the forex market frequently integrate algorithm programs to readily keep the price of their currency pairs updated. This enhances the rate at which banks or other key financial organizations would quote their prices and minimizes the manual labor involved.
Individual traders can program algorithms to help them minimize their risk of exposure. Algorithms are essential for placing a currency-par sell order when the current price differs from the previous value. Also, algorithms are as well used widely for speculating on the price action in the forex market.