Updated 9 July 2020
When it comes to forex trading, passing control over to a forex automated trading system can be effective. Use of a robot removes the emotional element of trading and allows an individual to be absent whilst the system trades on their behalf. Dedicated programs are capable of working out calculations at speeds no human could and can make tens of thousands of trades in a matter of seconds.
Automatic, or algorithmic, forex trading strategies refer to the different tactics and methods of trading an automated system can employ to generate the highest possible profits for the trader. In algorithmic trading, a specific trading strategy is translated into code and can be left to run without a human present.
Traders must decide on a strategy that will work best for them; there are many tried and tested rule-based automated strategies that are readily available from brokers or third party suppliers, but some individuals prefer to create their own.
If you aren’t proficient at coding, code can be produced by a third party or a specific program after you submit the required inputs.
Some strategies are easier to code than others; if you manually trade with a strategy which is very personal to you – subjective and not rule-based – it is likely to be extremely difficult to code.
There are many different trading strategies available to purchase, here are five of the most popular:
Inflation, war, political unrest, natural disasters, elections and bank talks, to name just a few, all have an impact on the world’s currencies.
A news-based trading strategy involves the algorithmic system reacting to news wires and generating trade signals based on what is happening in real-time.
Characteristically, this type of trading involves holding positions for a very short length of time – given the fast-paced media world where information is news one minute and forgotten the next.
This is one of the most straightforward strategies and involves following market trends. A trend is where a price is moving in a certain direction (for example, up or down).
When the trend is going upwards, the automated system may take a long position – buying in anticipation of the stock, currency or commodity rising in value.
When there is a downward trend, the system is likely to go short, which means selling off the security to purchase it again later at a lower price.
Automated systems are capable of comparing current data with historical data to predict how likely it is that a trend will continue (rather than reverse).
This strategy works on the understanding that historical returns and asset prices will at some point return to their average levels. This strategy attempts to capitalise on dramatic changes in the price of a security, with a view to it returning to its previous position.
This is a strategy that can be applied to buying and selling; traders can make a profit on surprise upswings and then save on anomalous lows.
It pays to remember that there are no guarantees in forex trading and that includes a return to a normal pattern. Uncharacteristic highs could return to a normal pattern, but equally, the high could be caused by certain events which throw things off-kilter long term.
One of the most valuable aspects of using an automated system is its ability to operate at a pace no human could. High-frequency trading (or scalping) is the method of using an automated system to potentially make hundreds of thousands of trades in a fraction of a second.
The biggest criticism of HFT is that it allows the big players to dominate because they can trade in such substantial blocks (using algorithms). This type of trading adds liquidity to the market; however, many consider this a negative because the liquidity produced only lasts for seconds – too short a time for non-HFT traders to benefit from it.
A positive of HFT is that it removes small bid-ask spreads. A bid-ask spread or a bid-offer spread is the difference between the price at which an asset can be sold, versus the price at which the same asset can be bought. By widening the gap between, HFT traders can often exploit the system and make more money.
‘Arbitrage’ is the term given to purchasing an asset in one market for a certain price and immediately selling it for a higher price in another market. This method relies on market inefficiencies; the trade is profiting through the exploitation of price differences on the same or very similar financial instruments across markets.
Arbitrage Trading Programs (ATP) use algorithms to identify price anomalies across different markets. Given how advanced technology has become, price anomalies don’t stay for long – they are picked up by traders with systems scanning for the same thing and then rectified. Therefore, ATP systems are the only way that these price differences can be taken advantage of – it is not something a human could do fast enough.
This strategy may seem fairly straightforward, but it should be noted that price differences in forex are usually minute. Therefore, traders using ATPs need to trade large positions to make a substantial profit.
So, which algorithmic trading strategy is best for you? A tried and tested off the shelf package? If so, which one? Perhaps a bespoke algorithm based on the way you have traded for years? If so, can you express that in code?
Here are some tips on how to choose a trading strategy:
The forex market has become increasingly popular given its ‘open all hours’ status (open 24 hours a day). What better way to make the most of a market which stays open longer than a person can comfortably trade, than enlisting the help of an automated system.
Choosing an algorithmic trading strategy can be difficult, but as long as you don’t deviate too heavily from how you would manually trade and you do vast amounts of homework to thoroughly understand what the algorithm is capable of, you’ll be on the right path to finding a strategy that works for you.
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