What is Algorithmic Forex Trading?

“Algorithm” seems to be one of the most used terms these days when it comes to talking about the internet. Everything we use seems to be determined by some kind of algorithm.

The word itself is intimidating, as it can refer to an abstract entity shrouded in mystery and uncertainty, but an algorithm, at its most basic and basic definition, is just a set of rules devised to accomplish a clearly defined task.

In the world of Forex trading, algorithms have found a very wide range of uses and great popularity, especially on what is now known as “automatic trading”.

How many different auto trading strategies are there?

Now you can choose to take the following information as you wish. For some, there are almost twenty different algorithmic trading strategies, a number that can certainly be overwhelming, but for those who really want to succeed in their Forex adventure in 2022, this is a huge opportunity.

If you are truly interested in knowing what each of these strategies entails, we encourage you to do some additional research, no matter how technical and time-consuming it may be. The more you know about this commercial world, the better. Now let’s explore more of the what and why of this form of algorithmic trading.

Why is automation so important for Forex trading?

The market moves faster than most of us can react, and since most of us physically cannot be glued to charts and market movements 24/7, we need backup media. Algorithmic trading solves this problem, allowing traders to automate various processes and reclaim their valuable time. Automation not only offers time benefits, but also cost savings. Manual execution is generally not fast enough to compete with this.

Now, not all traders are ordinary people, in fact most of the activity that takes place in Forex comes from financial institutions, such as banks. What you may not realize is that the whole Forex market is actually facilitated by banks, playing both sides, doing the trades for their clients in exchange for a spread, and by engaging their own traders to speculate and trade in the market as well.

Is Algorithmic Forex Trading Risky?

In any market there is risk, and Forex is no different, however, rather than increasing risk, algorithms are designed, at a basic level, to mitigate that risk. It’s not a perfect system, however. If everyone uses algorithms, who wins and who loses? If the most powerful institutions develop or acquire the best technology and data, their seemingly unfair advantage would cause big changes in the way their competitors trade.

This means, in simplified terms, that the algorithms could cause a stock market crash. They could lead to changes that they are not ready to react to, resulting in a negative spiral. This eventuality means that algorithmic trading should always be monitored by people and suspended when the market is very volatile, although a massive suspension of algorithmic trading could also cause a stock market crash! Let’s hope for neither.

The risks are there to be seen, and Forex is obviously quite fragile. All you can hope for is that your strategy and efforts will bring you solid profits while mitigating your risks.

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