Understanding Algorithmic Trading for Forex

Ever since Wall Street introduced screen-based trading in the ’90s, technology has advanced to the point where today, anyone with a smart device and an Internet connection can get into forex trading.

It’s even increased the speed at which trades are made, which eventually brought about high frequency trading. To keep up, brokers and traders alike are becoming even more reliant on technology, creating an exciting cycle of innovation.

In a market that, according to Bloomberg, has a turnover of over $6.6 billion (£4.75 billion) a day, one particular piece of tech that’s making waves is the algorithm. Here’s a quick guide on algorithmic trading, how it’s changing the face of forex, and what it can do for you.

What it is

Generally speaking, algorithms are a set of computer commands that have a specific purpose. They usually help automate manual tasks, such as sending out scheduled emails or deciding what you see next on your newsfeed.

In financial markets, algorithms have four general functions. The first is to create statistics based on previous market data, which helps you look for profitable trading opportunities. The second is auto-hedging, which, by automating the hedging process, removes human error in judgement and lowers risk for traders.

But hedging isn’t the only thing that algorithms can automate in forex. As we’ll discuss later, it forms the basis of other execution strategies, too. Finally, algorithms offer direct market access, making forex more accessible than ever with a multitude of platforms from which to trade.

Moreover, using algorithms can actually save you money in the long run. In fact, even banks use them so they don’t need to quote market prices manually. Eventually, this lowers transaction costs. And the pinpoint accuracy algorithms provide makes speculative trading less risky, too.

How to get started

If you want to give algo trading a go, we at Bytemine have previously covered how algorithms are highly versatile. Consequently, they can be integrated with a number of existing forex strategies.

Choose your strategy

If you want to start your forex journey with something easy, you can try the simple yet effective price-action strategy, which involves making all your decisions based on a clear price chart. And because the market trades in foreign currencies, algorithms can also help you conduct news-based strategies, keeping you in-the-know on current events that may affect prices, as well.

You can also try more advanced techniques, such as the carry-trade strategy, where you try to profit off interest rate differentials, or even position trading, which is similar to investing and involves committing to the position of a particular currency pair for a long period of time.

Choose an algorithm

Once you know how you want to play the market, choose an algorithm that perfectly suits your needs.

If you are someone who is not familiar with coding, Bytemine Beta provides an intuitive graphical interface where all you need to do is drag and drop things where you want them and create your own strategy. You can back-test your created strategy in real time and judge how it is doing in terms of performance before you deploy it live.

Meanwhile, other platforms offer pre-made algorithms that you can tweak. In fact, many algorithmic traders rely on MetaTrader 4 on FXCM, which is described as a useful platform — not just for advanced market analytics, but also for making fully customisable algorithms for trading automation. This is done through the Integrated Development Environment (IDE) and the MQL4 programming language.

And for experienced algo traders, platforms like ProRealTime offer an easy solution for building unique trading algorithms. With the ProBuilder coding language, you can even backtest and further refine your creations, helping the algorithms respond faultlessly to your unique demands.

Things to consider

Though algorithms have brought a number of improvements to forex, it’s still important to note that, as with any market, risks are still present. As more people utilise algorithms, the more likely it is for a market crash to occur, reports Reuters.

This is because an oversaturation of algorithms in the market can lead to too many internalised trades, which in turn can actually decrease the quality of publicly reported prices.

Despite this, there are risks whether or not you decide to use algorithms, so it’s better that you’re informed either way.

Disclaimer: There are potential risks relating to trading and investing and you should not trade with money that you cannot afford to lose however, for those that educate themselves and adopt appropriate risk management strategies, the potential update can be significant. Please note that all opinions, research, analysis, and other information are provided as general market commentary and not as specific investment advice.

Bytemine: Build, backtest, and deploy trading algorithms for all major global financial instruments and asset classes from your browser without coding. Our easy-to-understand graphical user interface helps traders of all levels to become more successful and enter each trade like a professional trader. Create an account today and access our global market data, trading signals and start creating your own trading algorithms on a free, limited plan. Upgrade anytime with no commitment.