Algorithmic Forex Trading

algorithmic forex trading

 The world is experimenting with new ideas and introducing techniques to make lives of people easier. Algorithmic forex trading software is also a product of a similar idea. However heavy the term “algorithmic trading” sounds, it facilitates investors to trade with the simplest of methods. Fuad Ahmed, a currency trading expert and analyst, will define for his readers the way algorithmic forex trading strategies can help traders and brokers with their business.

Algorithmic trading software is another name for automated trading software that has been commonly used for stock business. It is a set of instructions and rules that help in automated execution of forex or stock trading deals with minimum human intervention.

Fuad Ahmed is going to highlight some algorithmic forex trading strategies in the following passages.

Simple Moving Strategy.

Established traders must be well acquainted with the idea of SMA, Simple Moving Average. It’s known as Moving Average Crossover. SMA can easily be estimated using calculations from a fixed number of days. There are 4 ways of calculating SMA in algorithmic trading.

  1. Make 5 day SMA calculations.
  2. Make 20 day SMA calculations.
  3. Remain on a long position when the 5 day SMA is equal to or greater than 20 day SMA.
  4. Switch to short position when a 5 day SMA is lesser than 20 day SMA.

 All algorithmic trading strategies commonly used today can be put into the following categories:

        Trend following/Momentum

        Statistical Arbitrage

        Market making


1. Momentum Strategy

Based on an assumption that algorithmic traders follow a particular trend in the market, we observe stats of a particular time frame; let’s say 7 days. This observation tells us if a trend is going to diminish or continue after the passage of a week. These stats observed in a week are determiners of the momentum a market will possibly form in the coming weeks. A trader following this momentum strategy plans his future moves.

2. Statistical Arbitrage

There are arbitrary prices arising and disappearing in a market. In algorithmic trading software, a trader can observe the changing prices and use them to his advantage until a market stabilizes. A market stays in this loop for such a short period that a person trading manually can barely notice and react to the change. An automated software not only reads the changes but immediately reacts to it as well.

3. Arbitrage

If we base our hypothesis over an assumption that a company when bought by another corporation, will have its share values multiplied. The acquisition of a company is followed by organization of events by new owners and placement of new pricing. This kind of strategy is called event-driven strategy. There are multiple factors like bankruptcy, merger, acquisition considered in such events. This event determines the new policies the company is going to adopt and its plan of investment for future. The algorithmic trading strategy that investors consider here are for stock market but can be implemented in forex trading.

Liquidity providers can be individual brokers or big financial companies that quote the price of buy and sell for an exchange. They are a medium which determine an average profit return for the trader through their speculations about a financial market. An algorithmic trading software also makes speculations about a financial market for its users .  

Market making strategy provides liquidity to the investor and securities of exchange which are not regularly found in the market. The market makers are the participants that can best balance the demand-supply equation for securities. A market maker has a fixed rate that he sets before placing a deal. This can be called his share in the order. The higher the price the broker sets, the higher the risk he takes in the deal. He can take help from an algorithmic trading software which minimizes the risk in deal for both trader and broker. 

The job of market makers is to provide liquidity to securities and set a bid-ask quote. The trading algorithm takes returns from the same bid-ask spread.

Market makers are always ready to buy and sell at the quoted price. There are strategies implemented from both sides that go hand in hand to provide liquidity to anyone who needs it.

This strategy is only valid if it can rightly predict the fluctuations possibly coming in the future price rates.

4. Algorithmic Strategy and Statistical Arbitrage

The best method for the explanation of statistical arbitrage is the assessment of spread of risk among a million of trades. This strategy with the help of statistics, gauge the possible scope of a trade.

5. Momentum and Algo-Trading.

In this type of strategy, we make short-term decisions based on the market trends. It is the study of consistency in the prices rates of forex and the market. Momentum is chasing the rates a market has been following for an extended period.

Final Word.

It’s not just about the strategy an investor builds in Algorithmic forex trading, it’s also about testing what turns out to best suit the trading style of an investor. A trader is always advised to measure the risks and profits involved in a strategy before finally adopting it.

Image source: audacitycapital

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