In this blog, we will discuss algorithmic trading. This trading method, also known as automated trading or black-box trading, is used extensively in forex trading. With the introduction in financial markets of online trading and automated trading, algorithmic trading systems have grown in popularity. We will discuss how does algorithmic trading work and what are some effective algorithmic trading strategies.
What is Algorithmic Trading?
Algorithmic (algo) trading uses a computer program to place trades. The computer program is based on an algorithm, which is a defined set of instructions. These instructions generate trade signals which can be executed on the trading platform. The computer instructions take into account key variables, such as time, price and volume. In essence, trading transactions make use of advanced mathematical methods to make pre-determined, high-speed trading decisions.
One of the questions that arise is algorithmic trading legal. The answer is yes. Of course, it is always prudent for a forex trader to use a reputable forex broker as there are scams and abuses in the forex market, no different than other business. The same rule goes with algorithmic trading – if you are executing trades through a reputable broker if it is reasonable to assume that the broker has ensured that the algo trading platform it is offering to clients is legal.
What Percentage of Trading is Algorithmic?
It may surprise you to learn that in the global equity markets, some 80% of trades are made by computers rather than by humans. In the forex markets, algorithmic trading accounts for about 20% of all spot trades. The numbers are much higher among large financial institutions, such as investment banks, mutual fund companies and pension companies. These organizations require the speed and data processing advantages that computers can offer over manual trades. The answer to does algorithmic trading work is clearly affirmative, or these large financial corporations would not spend money on such a method.
What are the Benefits of Algorithmic Trading?
Most of the daily transactions which occur in the financial markets are made with algorithmic trades. The advantage of utilizing computers is that machines are able to perform complex calculations in mere microseconds; a human, on the other hand, would require hours or days to complete such tasks. As well, humans inevitably commit errors, which of course is not a concern with computers.
There are additional benefits for corporations from utilizing algorithmic trading. This includes being able to provide clients with lower spreads, increasing efficiency and providing greater transparency and an audit trail. As well, algorithmic trading reduces market impact, especially in the case of very large trades.
Individual forex traders are increasingly utilizing algorithmic trading programs. Algo trading offers a method of keeping emotion out of a trade. Often, traders become emotionally connected to a position and make a move that may not be the most rational. With algorithmic trading, the trader can eliminate the risk of emotional attachment and leave the trade in the hands of the computer. As well, algo trading offers the ability to trade 24 hours a day, without the need to physically be in front of a computer and monitor the market.
A word of caution – algo trading eliminates manual intervention in forex trade, but it does not reduce the risk involved in forex. Is algorithmic trading profitable? The answer is yes! However, a key rule in forex is once you have developed a trading strategy, it is prudent to test that strategy on a demo (practice) account, in order to experiment without entailing any risk. The same rule applies to algo trading; once you feel comfortable executing a trade using algorithms, make sure to test it out on a demo account. If you are satisfied with the results, then it’s time to make the move to live to trade!
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How to start Algorithmic Trading
If you are interested in how to learn algorithmic trading, make sure that your trading platform offers this application. If you’re not sure where to begin, may we suggest taking a look at MetaTrader4, which is one of the most popular forex trading platforms? MetaTrader4 is tailored to algorithmic trading for beginners and also provides algorithmic trading. Once you have settled on a trading platform, you will need to choose a forex broker in order to place your trades.
Your trading platform will provide you with instructions on how to submit an algorithmic order. This should include the following parameters (the captions of the parameters may vary slightly):
- Amount – specifies the order size of the position
- Venue – used to select the bank providing the algo
- Limit fields – this sets the limit prices for a trade so that a trade is only executed within these prices
- Duration – specifies the start and end times of the trade
Algorithmic Trading Strategies
Like other trading methods, the goal of any algorithmic trading method is to achieve optimal trading execution at the best possible price. Let’s take a look at some of the most popular algorithmic trading strategies. You can select any of these methods or mix and match them into a trading strategy that works best for you.
Trend Following – This method follows market trends. Buy and sell orders are generated based on instructions which are fulfilled when technical signals have been triggered. A well, the instructions can be set to review historical and current data in forecasting whether a current trend is likely to continue or reverse directions.
News-based – Many traders “trade the news”, relying on the fact that financial or political news can move markets. An algorithmic trading system can be connected to news sites, with trade signals being generated based on breaking news events.
Mean Reversion – this system relies on the presumption that markets trade within a range of 80% of the time. In this method, the algorithms are set to calculate an average asset price, under the assumption that it’s likely that the current price will eventually return to the average asset price.
Arbitrage – this trading system checks for price discrepancies across different markets and makes a profit on the spread. However, forex price differences are so minute, that a trader would have to trade a very large position in order to make significant profits.
High-frequency Trading – This method is suitable for high trading volumes, with the algorithms detecting quick price fluctuations which trigger buy or sell signals.
How to Build the Algorithmic Trading System
As we mentioned earlier, many forex brokers provide trading platforms which provide algo trading, such as the popular MetaTrade4 trading platform. These platforms come with built-in indicators, allowing the trader to select their trade parameters at the push of a button. This is ideal for the beginning trader or an experienced trader who is content to use the algorithms provided in the platform.
For those experienced traders who are looking to go a step further, there is the option of developing your own algo trading application. Such traders will certainly benefit from the knowledge of the MQL5 programming language, but a programming background is not a prerequisite, thanks to the features on the MetraTrader5 platform. This platform enables traders to custom develop trading applications.
Why Trade With Platinum Trading Academy?
Many traders jump into the forex arena with little or no preparation, confident that they will ‘figure out on the go’ how to make money trading currency. However, these individuals have a lack of knowledge about the forex market and have failed to prepare a trading strategy. More often than not, these traders are left disappointed, after seeing their capital quickly disappear. Taking steps in order to learn online trading is essential to becoming a successful trader - this point cannot be overemphasized. In order to learn how to trade currency and make money, every trader needs discipline and a trading strategy that fits his or her needs and goals.
Platinum Trading Academy is tailored for a trader at any level, whether a relative beginner or an experienced trader. We provide each of our students with a private forex mentor, rather than a “one size fits all” seminar or webinar course. With Platinum’s step-by-step mentoring and in-depth training courses, you will learn how to trade online and how to develop an effective trading strategy. If you are looking for an online algorithmic trading course that will build your confidence and produce consistent results, then Platinum Trading offers a superb algorithmic trading training experience!
Check us out here.
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Summary
This article has provided an explanation of algorithmic trading, and provided algorithmic trading strategies and insights into this method of trading forex. Algorithmic trading is especially popular with large financial institutions, but it is gaining popularity among individual traders, who are eager to utilize its benefits as part of a successful trading strategy.
The Platinum Trading System
The Platinum Trading System has been around for over a decade and has proven itself an incredibly effective trading tool to traders all around the globe. It has allowed traders to utilise Platinum’s unique trading strategies, only made possible by our unique algorithm.
Below you will find short explanations of our Trading Strategies, and see first-hand how powerful Algorithmic Trading can be when used correctly.
End of Day Strategy
This Strategy allows you to take advantage of the Crossover between the London Trading Session, and the New York Trading Session. During a certain time of the day, volatility increases as order flow shifts over from the United Kingdom, to the United States. Knowing how and where to trade this volatility is what will separate you from the every-day trader, to the true professionals.
Asian Range Trading Strategy
Similar to the End of Day Strategy, this strategy once again takes advantage of a Crossover. This time we’re looking at the crossover between the New York Session, and the Tokyo Session. Crossovers are an important time in the markets, as it affects not just retail traders trading from home, but large institutional traders trading on powerful computers in their glass towers. Take note of these crossovers, and use them to your benefit.
Extreme Zone Strategy
This strategy makes use of extreme volatility. There are times in the market, such as during High-Impact News Events, that volatility goes from zero to a hundred. Most of the time you’d want to completely avoid the markets during these times. However, using the Extreme Zones plotted by our algorithm, there is still an opportunity to extract a decent profit from the market, while your fellow traders simple sit back and wait for the storm to pass.
News Trading Strategy
Unlike the Extreme Zone Strategy, this is for the more general news events, such as interest rate decisions, inflation announcements, retails sales, those that don’t have as much of an impact but still manage to move the markets by a significant enough margin to justify trading. Simply plot your trades in line with the strategy outlined in the video, and let the markets do the rest.
Range Reversal Strategy
This strategy utilises an important trading level. Prices ending in 80. This strategy is only made possible using our unique trading algorithm. As explained in the video, this strategy is usable anytime there aren’t high-impact events either expected or ongoing. Simply match a third or fourth zone with a price ending in 80, and set up your trade.
Double Zero Confluence Strategy
Similar to the Range Reversal Strategy, this strategy utilises prices ending in 00. This strategy is also usable at any time so long as there aren’t high-impact events either expected or ongoing. The only difference between this strategy and the Range Reversal Strategy is that the Double Zero Confluence Strategy is not confined to just 2 Zones, but is usable in any of our Buy or Sell Zones.
Trend Continuation Retracement Strategy
The Trend Continuation Retracement Strategy is a little more complex than the previous strategies but is relatively simple once you understand it. There is one simple condition for this strategy to become active. A pair must reach a 5th Zone. Once it reverses, you’ll want to apply your Fibonacci Retracement, and prepare to trade either the 61.8 or 38.2 retracement level.
Hopefully, you have enjoyed today’s article. Thanks for reading!
Have a fantastic day!
Nisha Patel
Live from the Platinum Trading Floor.