In the world of trading, many things may not cross our minds. Or the stuff we underestimate. The same is the case with algorithmic forex trading. Although it is not a terminology that may cross our minds all the time, it is very much an integral part of trading.
What is forex algorithmic trading?
Forex algorithmic trading, or trading by algorithm, is the process by which trades are executed using computer programs to analyze data and execute trades on the forex market. Algorithmic traders depend on quantitative methods such as technical analysis when it comes to decision-making.
The concept of algorithmic trading, or algo-trading, is mostly just a more technical way of automated trading. A single algorithm is a set of mathematical rules which a computer program follows to solve a computer.
For example, when the same methods are applied to forex trading, the same problems usually center on a combination of price, timing, and volume.
If we break it down into parts, an entry point, an exit point, and in usually marks an algorithm-between those, various sets of rules or actions determining risk.
Interestingly, their simplicity and complexity depend on the person programming and how simple or complicated they want it to be. In most cases, however, they are complex.
Contributing factors are tested in an environment where the conditions keep changing and moving, sometimes even moving very quickly. It is the main advantage that algorithmic trading has over humans, time and speed.
How do algorithms run?
Many algorithms can run simultaneously; there is no fixed amount. It is also a bonus because this makes the process of trading much faster and more productive. As a trader, you can run hundreds of programs simultaneously, which allows you to cover many different positions and a wide range of strategies.
And here is more good news. For someone using algorithms, the sky is the limit.
Benefits of algorithmic trading
- – Algorithmic trading has continued to progress over the years because there are many advantages. Algorithmic trading eliminates the element of emotion from trading. It is quite common for traders to take emotional decisions instead of rational ones when it comes to trade. But also trading helps us take care of that.
- – Along with this, algo trading can also improve the execution of trades. Since it is multitasking and a much faster methodology, a lot of work gets done quickly. It makes the trader achieve a lot more than if they were not using algorithms. With algo trading, it is much easier to run a backtest as you can pick up past data and analyze it. Trading is just more fun and more accessible.
- – Although there are many upsides to algo trading, there are a few setbacks. One major setback of this trading is that since they do it at such a high rate, a minor bug can lead to significant financial losses within a matter of minutes. A trader is bound to lose control in such a situation.
In the world of forex trading, algorithmic trading has found many uses and gained great popularity. It has made the lives of the traders easier, making trading more fun and productive.
