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8 Types of Algorithmic Forex Strategies.

Started by PocketOption, Apr 24, 2020, 10:54 am

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8 Types of Algorithmic Forex Strategies.
As promised, here's the next part of my series on algorithmic forex trading systems. Make sure you check out the first part on What You Need to Know about Algo FX Trading before reading on!
This trading approach usually appeals to those who are looking to eliminate or reduce human emotional interference in making trade decisions. After all, buy or sell signals can be generated using a programmed set of instructions and can be executed right on your trading platform.
"Amazeballs! Here's my money! Where do I sign?"
Hold your horses, young padawan! Put your hard-earned cash back in your wallet and spend a little more time understanding algorithmic trading first. To start off, let's take a look at the different classifications of this trading approach.
Algorithmic Trading Strategies.
There are eight main kinds of algo trading based on the strategies used. Pretty overwhelming, huh? Of course you can mix and match these strategies too, which yields so many possible combinations.
1. Trend-following.
One of the simplest strategies is simply to follow market trends, with buy or sell orders generated based on a set of conditions fulfilled by technical indicators. This strategy can also compare historical and current data in predicting whether trends are likely to continue or reverse.
2. Mean reversion.
Another basic kind of algo trading strategy is the mean reversion system, which operates under the assumption that markets are ranging 80% of the time. Black boxes that employ this strategy typically calculate an average asset price using historical data and takes trades in anticipation of the current price returning to the average price.
3. News-based.
Ever try trading the news? Well, this strategy can do it for you! A news-based algorithmic trading system is usually hooked to news wires, automatically generating trade signals depending on how actual data turns out in comparison to the market consensus or the previous data.

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4. Market sentiment.
As you've learned in our School lesson on market sentiment, commercial and non-commercial positioning can also be used to pinpoint market tops and bottoms. Forex algo strategies based on market sentiment can involve using the COT report or a system that detects extreme net short or long positions. More modern approaches are also capable of scanning social media networks to gauge currency biases.
5. Arbitrage.
Now here's where it gets a little more complicated than usual. Making use of arbitrage in algorithmic trading means that the system hunts for price imbalances across different markets and makes profits off those. Since the forex price differences are in usually micropips though, you'd need to trade really large positions to make considerable profits. Triangular arbitrage, which involves two currency pairs and a currency cross between the two, is also a popular strategy under this classification.
6. High-frequency trading.
As the name suggests, this kind of trading system operates at lightning-fast speeds, executing buy or sell signals and closing trades in a matter of milliseconds. These typically use arbitrage or scalping strategies based on quick price fluctuations and involves high trading volumes.
7. "Iceberging"
This is a strategy employed by large financial institutions who are very secretive about their forex positions. Instead of placing one huge long or short position with just one broker, they break up their trade into smaller positions and execute these under different brokers. Their algorithm can even enable these smaller trade orders to be placed at different times to keep other market participants from finding out! This way, financial institutions are able to execute trades under normal market conditions without sudden price fluctuations. Retail traders who keep track of trading volumes are able to see only the "tip of the iceberg" when it comes to these large trades.
8. Stealth.
If you think iceberging is sneaky, then the stealth strategy is even sneakier! Iceberging has been such a common practice in the past few years that hardcore market watchers were able to hack into this idea and come up with an algorithm to piece together these smaller orders and figure out if a large market player is behind all of it.
As you've probably guessed, it takes a solid background in financial market analysis and computer programming to be able to design such sophisticated trading algorithms. Quantitative analysts or quants are typically trained in C++, C#, or Java programming before they are able to come up with algorithmic trading systems.
Don't let that discourage you though! The first three or four kinds of algorithmic trading strategies should already be very familiar to you if you've been trading for quite some time or if you were a diligent student in our School of Pipsology.
Do stay tuned for the next part of this series, as I plan to let you in on the latest developments and the future of algorithmic FX trading. 'Til next week!

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Real-Time Forex Trading.
What is Real-Time Forex Trading?
Real-time forex trading is a form of speculation in which a trader bets on the movement in the exchange rates of foreign currency pairs. This type of trading involves placing an order to buy or sell a specific currency pair at the current exchange rate. Stop or limit orders may also be used, but typically in close proximity to the current exchange rate. Real-time forex trading requires the use of real-time forex charting software. This style of trading is typically associated with short-term traders using technical trading methods.
Key Takeaways.
Real-time forex trading is taking trades based on real-time price quotes or price charts. Real-time forex traders are typically short-term traders, although anyone can buy or sell based on real-time prices. Longer-term traders are less concerned with the by-the-second price changes. Real-time forex traders rely on accurate pricing information, rapid execution, and often some sort of technical analysis-based trading system or strategy.
Understanding Real-Time Forex Trading.
Forex currency traders perform real-time forex trading on the foreign exchange market. To do this, they use analysis based on technical and fundamental indicators, which help them forecast the movement of the currency pair traded. Because real-time currency trading is wholly electronic, execution speeds are extremely fast, allowing the trader to quickly buy and sell currencies in an attempt to cut losses and take profit.
The potential for significant losses is a reality with forex trading. Because of this, the ability to access information in real-time, or ensure that buying and selling occur without any significant lag time, is of utmost importance to traders. Even with timely price quotes and rapid execution, it is still possible for traders to face larger than expected losses if the price gaps through their intended exit point. This is common during major news announcements, when liquidity may dry up resulting in larger losses (or profits) than initially anticipated.
The Composition of Forex Trades.
On the forex market, the largest market in the world, traders buy and sell various currencies around the globe. Forex trading involves the purchase and sale of currency pairs. Currency pairs are the national currencies from two countries or zones coupled for trading on the FX marketplace. The exchange rate of the pair is the rate at which one currency can be exchanged for the other.
The calculation for the rates of exchange between foreign currency pairs is a factor of the base currency. A typical currency pair listing may appear as, EUR/USD 1.3045. In this example, the euro (EUR) is the base currency, and the U.S. dollar (USD) is the quote currency.
This rate means it costs $1.3045 to buy one euro. Buying this pair means buying the euro and selling the USD. Selling this pair would mean selling the EUR and buying the USD. This happens with the click of a buy or sell button related to the EUR/USD pair.
Real-Time Forex Trading Accounts.
Trades pass through a broker where an individual holds a standard, mini, or micro account. Standard forex accounts trade in lots of 100,000 base units, Mini accounts allow 10,000 unit trades, and Micro accounts allow 1,000 base unit trades. Also, Standard accounts enter orders in multiples of 100,000, whereas mini account holders place them in multiples of 10,000. Micro accounts may use any multiple of 1,000.
The forex market is open for 24 hours, five days per week. With buying and selling among traders scattered across different time zones around the globe real-time forex trading can occur at any time of day, fitting into any schedule.
Forex brokerages offer real-time forex trading charts to clients. Websites that offer free trading charts may not guarantee the information is accurate or timely. Also, because each broker may have different traders and banks providing liquidity, rates sometimes vary slightly between brokers and/or charts available online.
Real-Time Forex Trading Tactics.
While any style of trader can use real-time charts to make trading decisions, short-term traders rely on real-time charts the most. An investor, for example, isn't as concerned with the by-the-second fluctuations of a currency pair.
Short-term traders include day traders and swing traders. Day traders hold positions for seconds, minutes, or maybe hours. Swing traders typically hold positions for days or weeks.
Some of these traders utilize trend trading as their primary trading method. Trend trading is attempting to capitalize when the price is moving in one sustained direction for a given period of time.
Other traders prefer to capitalize on ranging price movements. Ranging price movements are more common when major markets for a currency pair are closed. For example, the GBP/USD will tend to be calmer and rangier when European and US markets are closed.
Trading chart patterns, such as triangles, flags, or head and shoulders, is also common.

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Algorithmic Trading.
With the rapid development of computer technologies at the end of the 20th century the process of trading in financial markets changed and became completely electronic. There also appeared a separate segment of trading known as algorithmic trading.
Algorithmic trading is an automated system for placing and managing trading orders on various financial instruments through computer programs based on mathematical algorithms. In algo trading trades take place without human participation. An algotrader or a quant trader only describes the algorithm of behavior of the robot (mechanical trading systems (MTS)) in different situations in the programming language. Based on the analysis of the previous prices of financial instruments, they predict the probability of falling of the future price in a given range. Robot enters into a transaction or quits it in case of certain changes in the price chart of the trading asset. A popular method of algorithmic trading is considered to be High Frequency Trading (HFT), that is to say the conduction of electronic trading at very high speeds. High frequency robots with the aim of generating high profits open and close short-term positions with high volumes.
Algorithmic trading strategies.
There are many strategies of algo trading, which are installed in a trading robot by programmers. Here are its main strategies:
VWAP (Volume Weighted Average Price) - Distributes the volume of requests uniformly within a certain period of time at the price of better supply or demand, but it does not exceed the volume weighted average price over a specified period.
TWAP (Time Weighted Average Price) - Executes requests and evenly divides them into equal time intervals. The strategy does not consider predicted changes of trading volumes, which may negatively affect the market.
Percentage of Volume - Supports the fixed percentage of participation in the market chosen by a user. It makes small and frequent transactions by well reacting to the jumps of volume.
Iceberg - Set selling or buying request, which does not display the entire size of the market requests. Potential buyers see only a part of the request and only after its execution the next part is being published. And this continues until its full implementation.
Trend - following strategy - the main objectives of the strategy are: the early detection of the emerging trend through various indicators of technical analysis, the release of signals for trading in the direction of a trend and the release of signals about the closure of the position when signs of a trend termination appear.
Arbitrage - Foreign Exchange market robot, fixing divergence of the prices on the same or equivalent instruments in various market places, buys cheap in one place and immediately sells in another place with the expectation that prices of the instruments will coincide and the positions will be closed with profits. Arbitrage is considered to be a risk-free strategy, because the robot buys assets for a short period of time, thus avoiding sudden price fluctuations during the time. Accordingly, the income from arbitrage transactions is also insignificant and the total profitability is formed by the frequency of transactions.
Scalping - a strategy for short-term intraday speculative transactions. High-frequency robots are the most commonly used robots for scalping, which open and close positions during seconds, in case of making a small profit in a few pips. Basically, the strategy is used in the derivatives market, where the commission from the turnover is significantly lower.
Pair trading or statistical arbitrage - the strategy aims to identify the correlation between various instruments of the market and make profits from the imbalance between them. In other words, in small time intervals one asset can be undervalued or overvalued against the other one. Robot uses that very moment by fixing the deviation of the current ratio from the value of its moving average. Algorithmic trading with all its advantages regarding the speed of trading, absence of emotions, providing high market liquidity, decrease of volatility in the market, etc. has also several disadvantages: - High-frequency algorithmic traders often make the market operation complicated, by making an excessive number of requests. - Unreasonable increase of volatility of the market. For instance, on May 6, 2010 for a few minutes, the Dow Jones Index dropped 8.6% (the loss of the market was more than $1 trillion). Then, during 90 seconds, the index regained 543 points (4.67%). The reason was that the high-frequency robots in case of uncertainty liquidated all their positions. The sharp outflow of liquidity on the background of the started drop of the index led to its excessive strengthening without any economic basis. - Failure of the algorithmic systems. There are some cases, when the major players of the market were on the verge of bankruptcy because of the failure of the program.