Algorithmic Trading

What is Algorithmic Trading?

Algorithmic trading is an advance trading system that makes use of conceptualized formulas and mathematical models so as to provide very fast and effective decisions.

It is based on a set of rules which are often characterized by the traders, such rules consist of price analysis, timeframe, the structures in which the trades will be placed and closed, money / risk management, and others.

Types of algorithmic trading

There are four different styles of algo trading, which are

Automatic Hedging
Statistical
Direct Market Access and
Algorithmic execution strategies

Auto-hedging is a risk management strategy that generates certain rules for reducing your market exposure to various risks. The goal of this algorithmic tool is to utilize predefined objectives which can be either execution of a particular trade quickly or decreasing the market impact.

Statistical on the other hand, searches for profitable opportunities within the financial market using a series of historical data or statistical analysis.

While, direct market access is meant for determining optimal speeds and the lower prices where a trader can gain access or connect with multiple liquidity providers at once.

One of the most important type of algorithmic trading is high-frequency trading, where there is an extremely high frequency of order execution. This can have significant benefits to a trader by providing the opportunity to place a trade in as less as milliseconds of price changes, however like any style of trading there are risks associated with it.

In fact, there are even more algorithmic trading types and techniques - like news based, arbitrage, iceberging, and others.

Implementing Algorithmic Trading in Forex Market

Financial institutions who dominate the forex market to a greater extent, often incorporate programmed algorithms that easily updates the price of their currency pair on the platforms. This enhances the speed at which banks or other major financial institutions would quote their prices and at the same time reduces the amount of manual work required for it.

There are even individual traders who tend to program algorithms for reducing risk exposure. Such algorithms are beneficial for selling a currency when its price does not match with what they had brought it earlier. This maintains constant quality of the currency and allows the trader to survive in the market for a long period of time.

Besides this, algorithms are extensively used for speculating the movement of the market. A combination of high-frequency along with the data interpreted by algorithms would help you in taking advantage of arbitrage opportunities that arises even due to minor price deviations in the currency pairs.