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Top Strategies for Forex Algorithmic Trading

Trading on the foreign exchange market has seen some pretty drastic changes over the years. The technological advancements of today have been revolutionary in every aspect of everyday life, and forex trading is no exception.

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    While trading in the past was done primarily over a phone cable, the easy access to a computer and internet connection has made things much more straightforward. Traders nowadays require real-time visibility into all the necessary information to make decisions and create institutional Forex trading strategies.

    Modern technology allows us to use AI tools to improve our chances in the forex market. One of the biggest game-changers in the trading market has been the introduction of algorithmic trading. By applying different techniques, traders are able to achieve high-frequency currency trading with the help of different software and programming languages like Python. These are trading systems that work with a high level of success and profitability. Even though algo trading forex on the market is not a 100% winning strategy, it does great to reduce costs and minimize the risk.

    What are the 4 Types of Algorithmic Trading?

    Broadly speaking, there are 4 main types of algorithmic trading that you can adopt:

    • Statistical As the name says, this type relies purely on stats from historical data to learn from past experiences. Systems with statistical algo trading are always looking for opportunities in situations that have proven to be successful in the past.
    • Auto-hedging This is a safer and more conservative approach whose main goal is to reduce risk rather than increase profit. It relies on investing in the opposite position of your main related asset.
    • Algorithmic execution strategies These strategies are used to improve the efficiency of executing a specific trading objective. It can be anything that you want to achieve quickly and certainly like reducing the market impact or finalizing a trade.
    • Direct market access It is essentially an order book that allows traders to quickly place trades. It gives them direct access and better visibility into the stock exchange with important information like prices and volumes.

    While it is not considered a type, high-frequency trading is another form of algo trading. It gives the traders the ability to perform trades within milliseconds of a price change. When properly used it can be quite advantageous, though it raises a few risks on the more volatile markets.

    The 3 Best Algorithmic Trading Strategies to Follow

    1. Trend Following Algorithm

    One of the most popular algo trading strategies is the trend following algorithm. It relies on following a forex indicator that shows trends in different parameters like price changes, channel breakouts, and average statistics. It is used by a solid percentage of forex traders as it is easy to adopt and does not require you to perform predictive analysis, which can be quite complicated to do as a beginner or intermediate trader. Consider checking out a list of the top forex automated platforms where you can make the most of this strategy.

    2. Arbitrage Opportunities

    In simple terms, arbitrage is investing in stocks at a low price on one market and selling them at a higher price on another. Situations like this can often be found on the forex market as well, and with this strategy, you can make the most of them. You just need to set the right currency trading algorithms in place that will automatically identify opportunities for arbitrage and place the orders when they are taking place. Brokers like AvaTrade offer educational material on trading strategies like these, read our AvaTrade review to learn more.

    3. Trading Range

    Also known as the mean reversion strategy, the trading range strategy is based on the idea that all assets have a normal price in normal circumstances called the “mean value”. This price periodically increases and decreases, but eventually reverts to the mean value at some point. By setting up a price range for the average value and implementing an algorithm to place orders when this value moves out of range, you can capitalize on trading this asset.

    What Is the Future of Algorithmic Trading?

    Algorithmic trading is currently on the rise, and yet the client expectations for it are becoming even more demanding and complex. Namely, there are a few things that can be improved and upgraded to better meet the criteria of the modern trader. Trading systems need to be able to provide more information to their clients in real-time—this way, traders will have the necessary insights to make better decisions when choosing the algorithms for a successful strategy. Additionally, by focusing on real-time information, transaction cost analyses will become significantly more practical.

    Traders should have access to smart algorithms that will react to different market conditions. In order to get the information they need, traders require modern tools that rely on AI and machine learning. These modern technologies have the capability to create new parameters which can be useful to create a winning strategy and implement the best algorithms for specific market conditions. Algorithmic trading is not going away anywhere in the near future, so an increased development of AI-powered tools is to be expected in the near future.

    If you need more help with your forex journey, take a look at our free daily forex signals or weekly forex forecast.

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