Algorithmic trading is trading that automatically uses computer algorithms to trade securities. You can use it in forex, stocks, futures and options markets. The primary purpose is to make profits by buying and selling assets at the right time.
There are two types of algorithmic trading: discretionary and systematic. Discretionary algorithmic traders use their judgement when making trades, while systematic traders follow pre-determined rules or models when making decisions.
Most algorithmic traders use some form of technical analysis to identify trading opportunities. It involves studying charts and indicators to identify patterns that suggest particular securities are likely to rise or fall in price. Other factors you should consider include news events, economic indicators and sentiment data.
Algorithmic trading has become increasingly popular in the UK in recent years. A study found that algorithmic trading accounted for around 60% of all trade in UK stocks, and it is likely to grow as more traders switch to using algorithms to execute their trades.
How to use algorithmic trading in forex
Choose a broker
The first thing you’ll need to do is choose a broker. You can choose from several brokers, and it is crucial to find one that offers the features you need. The most critical aspect to consider is spreads – the difference between asset buy and sell prices. Brokers that offer low spreads are likely to be the best choice for algorithmic traders. You can also check for the ability to use algorithmic trading in online forex trading.
Open an account
After choosing a broker, you need to open an account. It is usually a simple process and can be done online. You will need to provide some information, including your name, address and contact details. You may also need to provide proof of identity and residency.
Fund your account
The next step is funding your account before you can start trading. You can do this by transferring money from your bank account or using a credit or debit card.
Choose a currency pair
The next step is to choose a currency pair to trade. A currency pair consists of two currencies, and you can buy or sell either currency in the pair. The most favoured pairs are EUR/USD, USD/JPY and GBP/USD.
Choose an algorithm
Once you have chosen a currency pair, you need to choose an algorithm to use. There are many different algorithms to choose from, and it is crucial to find one that suits your trading style. The most popular algorithms are the Moving Average Convergence /Divergence (MACD) and the Relative Strength Index (RSI).
Enter your trade
Once you have chosen an algorithm, you need to enter your trade. It involves entering the money you want to invest and your trade direction (buy or sell). The broker will then execute the trade on your behalf.
Set stop-loss limits
It is crucial to set stop-loss limits to protect your investment. A stop-loss limit is a point at which you will sell a security if it falls below a specific price. It helps to minimise losses if the market moves against you.
Monitor your account
It is essential to monitor your account regularly and adjust your trading parameters as needed. It would be best to watch news events and economic indicators affecting your chosen currency pair.
Monitor your account
It is crucial to monitor your account regularly to ensure that your trades perform as expected. You can do this by viewing your account history and trading chart.
Close your trade
When you have made a profit, it is vital to close your trade. You can do this by clicking the “Close” button on your trading chart. If you lose money on a trade, it is best to let it run until some of the losses are recovered. Your broker will automatically close your trade if it reaches its stop-loss limit.
Benefits of using algorithmic trading in forex
Reduced risk
Algorithmic trading helps to reduce the risk of losses by automatically executing trades based on predefined parameters.
Increased efficiency
Algorithmic trading can help to improve trade efficiency by automating the trading process.
Greater flexibility
Algorithmic trading allows traders to execute trades quickly and easily.
Improved profitability
Algorithmic trading can help traders make more profitable trades by providing accurate market data.
