In our article today, we want to talk about the advantages of algorithmic trading for any trader. Specifically in the forex market. Before that though, we need a little refresher to get us in the right frame of mind. Last time we discussed the great advantages the modern version of trading can give everybody. The main innovation that allowed for such changes was, of course, technological. In the past, everything had to be done manually in trading. A person would sell and buy assets for a trader according to their will. This had some great disadvantages, though. For one, people are much slower than computers, and for two they are more likely to make mistakes. A computer program is much more efficient, overall. This also meant that brokerages no longer had to spend as much money on people to carry these transactions through. For the most part, computer programs now did all the heavy lifting. This also made trading much cheaper and accessible for everyone.
Last time, we specifically discussed certain types of orders you could make, usually through brokerage sites. Examples could be stop or limit orders. They could allow you to automatically pull out of or get into a trade at specific price points. The advantage of this is quite obvious. However, over time, such programs have become more complicated. Many take advantage of certain algorithms, to more efficiently take advantage of the market. Using such programs would be algorithmic trading.
What is algorithmic trading?
This is the deeper level of technology that offers traders far greater profits in trading. Most of the time, one can run these programs passively and make money on the side. As long as one is using an effective algorithm, such a program is bound to be more successful than other manual traders. This is mainly because of the time efficiency a program has. No human being can realistically find a pattern to establish a trading plan and make a transaction anywhere near as quickly as a computer model can.
Usually, all that one needs to do beforehand is fill in a few parameters, and the program does everything for you. This could be the volume of trades, quantity, etc.
Today, then, we shall be exploring the several types of algorithmic trading programs available. Of course, the very best algorithmic trading programs are the ones that people develop for wealthy clients. No one is likely to share information about these programs. However, that does not mean that there is still plenty of space left over for other programs to help budding traders.
Statistical algorithmic trading
This type of trading looks at the statistical behaviour of a currency pair, and then one develops an algorithm based on it. Such a program should allow for algorithmic trading that would make money for you efficiently. Of course, to do this, understanding statistical analysis is crucial. With this kind of knowledge, one can figure out where the patterns are amidst all the noise.
However, once you do the analysis and set up the algorithm, you should be good to go. The program will take care of everything.
Auto-hedging
This, as one would assume, is all about normal hedging, taken to its natural conclusion. Like in the last program, you do have to do your homework. You have to study the statistical patterns for a currency pair and create a program accordingly. However, your goal for the program that would be different. You should want to minimise losses rather than maximise profits. This means taking advantage of derivatives and trying to diversify as much as possible. This will bring in slow and steady profits.
You can then apply the algorithm to any currency pair you are trading you feel unsure about.
Direct Market Access
This is the final type of algorithmic trading we will discuss. With this type of program, one tries to directly access the order book of an exchange. Usually, this type of ability is only available to certain professionals. However, with this, one can use information technology from places like investment banks to one’s advantage! They can then control how a trade goes through at the end.
A caveat
One should not forget that other people are also using such technology in the long run. This means that, even if you are currently ahead, you have to keep striving forward to stay ahead of the curb. This makes algorithms more complicated and sophisticated over time, but the competition is tough.
