16 September 2015

Trading Forex: Algorithmic trading

Algorithms are computer programmes which traders can use to analyse trades, give them a prompt to buy or sell manually, or, more likely, to conduct the trades automatically, much faster than a human could.

​​​​​​Algorithmic trades now comprise as much as 75% of all trades in the global marketplace, according to some estimates [Source: tradersdna.com].

The process of automation is designed to take a lot of the work and time out of trading. It may be used to maintain a certain level of risk exposure, by automatically buying and selling at certain levels, so is favoured by large, institutional investors. 

Trading strategies which are entirely algorithm-driven and automatic are known as black box strategies. 

Strategies used can include trend-following, mean reversion, headline-scanning, or high frequency trading. The latter is a particularly contentious method which aims to take advantage of arbitrage opportunities through tiny price changes by trading at lightning speed.

Financial regulators have expressed concern about high frequency trading in the past, arguing it can worsen periods of volatility and sharp sell-offs in the market. It was seen by some as a major contributing factor to the 'flash crash' of 6 May 2010, in which the Dow plunged 9% within a matter of minutes before rebounding, although this argument is disputed.​

According to Greenwich Associates, 11% of FX market participants used execution algorithms for some portion of their trading in 2014, up from 7% in 2012, so it seems black box trading is set to increase, regardless of regulators' misgivings.


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