Exploring 5 Basic FX Algo-Trading Strategies to Excel in Automated Trading

With the rise of AI and machine learning, the forex market is also noticing the tendency of adopting advanced technology for executing trades with minimal manual intervention. Traders all around the globe are increasingly started to rely on forex trading robots for a faster and algorithm-based trading experience. With the help of algorithmic trading methods, traders can get a more result-oriented trading journey that is immune to any rash decisions influenced by emotions along with faster execution.

Reasons to use an automated trading method

  • The best available pricing can be acquired to conduct trades
  • Transaction charges are reduced owing to nominal human interaction
  • Execution of trading orders in a timely and precise manner
  • Systematic analyses on several market situations at the same time
  • Trades were executed on schedule and in real-time. As a result, substantial pricing movements can be avoided
  • There is a lower chance of manual error while placing transactions
  • The ability to perform the HFT method that tends to gain from executing a large volume of trades at a faster pace throughout various markets. 

Now that we have gone through the major benefits of Algo-trading, let’s take a quick look at a few of the techniques that are commonly employed by experienced FX investors.

Arbitrage strategy

Arbitrage strategy is an automated trading technique that takes advantage of arbitrage possibilities by utilising algorithms to detect and execute them as fast as feasible. Whenever the prices of assets on various exchanges fluctuate, an arbitrage potential tends to emerge. Such trading possibilities can be found in a variety of markets and in numerous ways where usually HFT techniques can be seen to take advantage of these. Since the difference between the prices is generally not so drastic, in order to gain substantial profit the quantity of the trades needs to be higher.

In the arbitrage approach, the success factor depends on the speed of execution and the accuracy of detecting profitable probabilities. For this reason, traders tend to prefer the automated trading method over the manual approach in terms of applying arbitrage strategy.

Trend based and momentum strategy

These two approaches are the most basic and commonly utilised Algo-trading techniques in forex. With the help of certain technical signals, traders observe the market’s patterns and momentum in these strategies. Indicators such as price fluctuations and moving averages are observed before executing a trade automatically upon meeting certain predetermined parameters. The historical data also plays a significant role in these strategies to determine how long the trend is supposedly last and make appropriate trading decisions.

Mean reversion strategy

Also identified as the reversal strategy, the characteristic of this strategy relies on the tendency of an asset’s prices to come to an average value after a certain point despite the highs and lows in its recent prices. This approach determines an asset’s upper and lower price limits and then uses algorithms to place trades when the value exceeds the standard range. Based on the past data the algorithms determine an average value of the asset and execute a trade accordingly in the expectation of a reversion. In the case of extremities, this strategy can be useful to determine profitable opportunities by taking the advantage of the sudden price swings. The drawback of this approach lies in its unpredictability as despite the calculations prices can end up reversing to a lesser risk to reward ratio.

Scalping or high-frequency 

Mostly preferred by veteran investors this approach revolves around gaining in modest amounts where the volume of the trade ranges in hundreds or thousands even. Traders also tend to take advantage of the extreme price fluctuations which often leads to trades lasting for a fraction of a second. Success frequently necessitates a large financial commitment in these methods of trading.

News based strategy 

Foreign currency markets are frequently influenced by economic occurrences as well as geopolitical decisions. Based on the significance of the events the intensity of the price tends to occur. These types of trading techniques create trade indicators based on real-time data and are usually brief, lasting from seconds to several minutes.

Conclusion 

The ability to automate trading methods in the forex market opens up a whole new range of opportunities that reduces difficulties like discretionary trading and managing impulses while making decisions.

Adam Hansen