Forex Trading Algorithims

Trading on the Forex market has a lot of benefits. You can trade on leverage, take advantage of low fees, and make trades 24 hours a day from Monday to Friday. However, Forex comes with drawbacks, too. One problem is that it's a complex, volatile market. Currency markets can behave strangely, and trading on leverage means mistakes are magnified. This is why many beginners turn to Forex trading algorithms to help them out at the beginning. These algorithms provide useful information and guidance while investors learn the market.

The Benefits of Forex Algorithmic Trading

There are many reasons that both experienced and new investors turn to algorithms to help them in the Forex marketplace. Here are some of the most compelling:

  • Algorithms are purely mathematical and eliminate pesky psychological flaws.
  • Algorithms are calculated on the fly, giving you quick access to valuable information.
  • Algorithms are a terrific learning tool. If you're an inexperienced trader, or perhaps a veteran trying a new strategy, algorithms can help you jumpstart the process.
  • Algorithms are automated, reducing any human error that could lead you to make a faulty decision.

The Basics of Forex Trading Algorithms

Algorithmic trading is a simple concept: It is the process of using computers or programs that are designed to adhere to a specific set of trading instructions. Once the criteria are set, it will either automatically make a trade for you (performing profitable transactions faster than a human ever could), or alert you that a profitable situation has arisen.

Usually, algorithms are based on key indicators like moving averages and return ratios. They can be used for a wide variety of purposes, however, especially on powerful platforms such as MetaTrader.

Strategies for Forex Algorithmic Trading

A Forex trading algorithm will only be as successful as the logic and strategy it is based on. You aren't guaranteed to make a profit with every successful strategy, but you'll definitely increase your chances. Here are some of the most popular ways that profitable Forex traders use algorithms:

  • Hedging automatically. Hedging is a strategy designed to protect your portfolio from significant, sudden losses. You can set algorithms that limit the amount of risk to which you expose yourself. For example, you can set algorithms for spot contracts (contracts that deliver immediately) as defense against sudden drops in the value of your long-term currency plays.
  • Arbitrage. Algorithms can identify arbitrage opportunities, which are always profitable. On separate markets, currency pairs might be priced differently. If the difference between the two pairs covers your spread, you can immediately buy and sell the currency for a guaranteed profit.
  • Analysis. One of the most important tools in an investor's toolbox is statistical analysis. Algorithms should be set to do complex statistical analysis for you, telling you exactly when the ideal time to buy or sell is.
  • High-frequency trading. High frequency trading is one of the most popular types of Forex trading algorithms. Your program will be able to identify liquidity opportunities that indicate a currency is about to experience an immediate drop or rise. When it does, it'll be able to make immediate transactions much faster than a human could.
  • Time-weighted average price. If you're going to make a large order of a currency pair, using a time weighted average price currency is a good way to ensure you get close to average market value. Your algorithm will purchase chunks of your order at evenly divided intervals, minimizing the impact of market randomness.

Requirements for Algorithmic Trading

Using algorithms to trade on the Forex is simple, but you do need to have some computer skills. If you want to design your own algorithms, you need to program them yourself or pay somebody to do so. You also need the ability to monitor your own algorithms using test account to make sure they're functioning properly.

If you want to use algorithms, but don't have the investing chops as yet, trading robots are a good alternative. They are built in to trading platforms like MetaTrader and are easy to implement without any special computer skills.

Now that you have your perfect algorithm set-up and tested, it's time to give it a whirl on the live market. Create an account with us to get started today!