An algo (short for the algorithm) is a set of rules orchestrated to complete a specific task.
In financial markets, algo trading uses a computer program that follows instructions given by the trader. It is also known as automated trading and black-box trading.
To give you an idea of algo trading, here’s an example:
Suppose a trader buys 100 units of EUR/USD when its 10-day moving average passes above the 200-day moving average. (A moving average is a representation of past data points on the trading charts).
Using this instruction, a computer program will automatically place buy and sell orders. A trader doesn’t need to monitor trading charts or place orders because an algo will do all of this.
Let’s further break down what trading with algo means in forex, and why is it important?
Forex trading with Algo
Thirty years ago, forex trading was a different story. You either need to have millions of dollars or part of big financial institutions for trading.
But now, much of the forex trading has been revolutionized by an algo. It has reduced the hours needed to conduct transactions and also helped in processing orders.
Just imagine going through all the trading cfds process manually! (it would be a disaster).
Next time if someone asks you how forex trading is the most liquid financial market, you can say it’s all because of an algo.
In forex, algo trading is associated with speculative trading. Using an algo, a trader allows himself/herself to profit from a slight price deviation.
Algo trading allows forex traders to set a specific exchange rate for buying and selling currency. This is due to forex options (an option is a financial instrument based on values of underlying assets).
Forex strategies that use algo trading:
Algo trading is used in the following forex strategies:
- Trend following
- News trading
- Market sentiment
How to create a trading algo for yourself?
Creating an algo for trading requires coding. Having programming skills at your disposal can help you fine-tune your trading algo. But if you don’t’ have any coding experience, you can use a service that provides an algo.
The developed code is plugged into a trading platform for trading purposes.
Although algo decreases human efforts, you need to take a few steps before you can begin real-trading.
- First, you need to select a time-frame and trading frequency. This is essential if you are not a full-time trader.
- As we mentioned strategies for algo trading, you must develop a trading strategy. If an algo isn’t working for one approach, you may want to consider altering your algo.
- The most important step is testing your algo. After having your algo code, don’t jump into conclusions. Practice your trading algo with a demo account. You should run an algo with past data of currency pairs. This will show you how currency pairs are performing with your algo.
Algo trading helps in lessening human activities. This leaves emotions (most important trading factor) out of practice.
If you mess with an algo, you won’t get any benefits from it.