Forex Algorithmic Trading Strategies: Concepts and Examples

In Forex markets, currency pairs are being traded 24 hours a day, five days a week, some $5 trillion a day. What made it possible are Forex trading algorithms – programs containing sets of rules defined by the user (Forex trader) which are subsequently carried out by computers. Algorithmic trading is even being pushed as a regulatory measure to curb inefficiency, lack of transparency and bias. These algorithmic trading systems make and carry out decisions concerning financial transfers by using complex mathematical models. Ideally, purchases should be made without affecting overall price. Sometimes it means strategically buying lots piecemeal at the rate defined by the algorithm, and later combining these smaller lots into larger ones that were originally desired – at the best possible price. There are several strategies to achieve this.

Forex Algorithmic Trading Types

Тhere are five basic types of Forex algorithmic trading in the markets, each with their own strategy: statistical algorithmic trading, auto-hedging, algorithmic execution strategies, direct market access and finally high frequency trading.

Statistical Forex algorithmic trading relies on statistical analysis. It is a type of Forex algorithmic trading where computers identify potential trading opportunities based on statistical analysis of available data in real time. Of course, this strategy is at its best as long as history repeats itself – but if it fails to do so… These programs help you determine the right time to make a buy/sell, but that is about it.

Auto-hedging is a type of Forex algorithmic trading whose goal is to reduce the risk of monetary loss as much as possible, without damaging the potential for making money. This is achieved by reducing the amount you can lose if the worst case scenario comes true. In Forex markets, auto-hedging relies on spot contracts and derivatives.

Direct market access refers to the speed and cost at which Forex traders can execute their algorithms utilizing multiple trading platforms. It enables individual traders buying and selling huge amounts of assets at pre-determined prices and risks. This means more control, lesser costs and less room for error. What more could you want?

The main feature of high frequency trading means executing transactions at insanely high rate. It enables traders to place orders without having to worry if the price changes by the time their order is executed. It does provide the opportunity to exploit miniscule changes in price at relatively low risk, although the speed at which this is done carries its own potential for errors. In Forex markets, high frequency trading algorithms lock on and exploit price differences and order imbalances of individual currency pairs.

Forex Algorithmic Trading Strategies
Forex Algorithmic Trading Strategies

Conclusion

As Forex markets continue to grow, so will the potential for abuse. The only way to effectively combat it is through increasing transparency, and algorithmic trading is a great way of achieving it. Furthermore, the liquidity and price consistency would either increase or, in the worst case scenario, remain largely unaffected. The only losers would be dishonest traders who take advantage of current price inconsistencies to make easy money.