What is algorithmic trading?
Trading with an algorithm is where traders take their trading strategy and put it into code, allowing a computer to execute that code 24 hours a day while the market is open. By default, trading manually is restricted to waking hours (often aided by the use of Red Bull, in my case), and is limited to the number of charts and currencies the trader can watch.
Naturally, the amount a single person can watch, monitor and trade is quite finite. But by utilizing an algorithm traders can have computers do in microseconds what would take humans hours to manually, thereby opening up a new supply of trading opportunities (not all of them being good opportunities, mind you).
Meta4 trading platform allows traders to create their own automated forex trading programs in what is called an “Expert Advisor.” The use of the software is free for all traders - demo and live.
The rise of the algorithm
According to my research, in 2004 a whopping 98% of trading in the foreign exchange market (or forex for short) was manual trading; but by 2010 only 55% of trading volume came from a human. The forex market is a fast moving market that is open 24 hours a day, and I think this huge influx in algorithmic trading is traders trying to capitalize on these factors.
Some exchanges here in the States have tried to embrace algorithmic trading, but have met resistance. My research concluded that forex has been more friendly to algorithms simply because the market has no central exchange to regulate where a trade comes from.
The Pros and Cons
One of the benefits of algorithmic trading in any market is the increase of liquidity. Algorithmic trading typically places more trades than a human naturally would, which opens up more liquidity for everyone: human and machine alike. But with this comes a change in volatility. An increase in volume naturally leads to increased volatility. But some suggest algorithmic trading might actually lower market volatility as algorithms aim for optimal execution at minimum cost.
What’s on the horizon?
One very important lesson from my college years is this: the more we learn, the more we learn we don’t know. My research into algorithmic trading has answered some questions, but seems to have opened up even more. For instance, what is the future of algorithmic trading, and how will it impact my trading? I’m currently researching this topic, and plan on releasing another infographic soon with my findings. Stay tuned: more good stuff is on the way!
For more information on Algorithmic trading, Here is a programming link: http://www.ibfx.com/Education/Programming, or You may contact Adam at <adam.evans@interbankfx.com>
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ReplyDeleteThank You Gerard, I didn't write this one, but I sincerely appreciate the compliment. Have a great trading week (^_^)!
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