Forex Trading Algorithm

Algorithmic trading is a popular strategy that automates execution – making trading faster and minimising human error. Learn how to start building an algorithmic trading strategy and which algorithm platform to use

What is algorithmic trading?

Algorithmic trading is a strategy that involves making decisions based on a set of rules that are then programmed into a computer to automate trades. The positions are executed as soon as the conditions are met.

Algorithmic trading has become incredibly popular in recent years, and now a significant portion of global trades are executed by machine-based algorithms. Previously, the strategy was only available to individuals who could do their coding, but now there are plenty of accessible ‘off-the-shelf’ programmes.

The main benefit of using algorithmic trading is that you can ensure your strategy isn’t impacted by sentiment or emotion, and that you stick to your trading plan. Algorithmic trading can also save you time, as you won’t need to manually find entry and exit points, your computer will do it for you. This means you can leave your algorithm to run 24 hours a day.

The downside of a trading algorithm is that you might miss out on opportunities that don’t fit into your program.

Benefits of Forex Trading Algorithms

Speed and Precision

Algorithms can analyze vast quantities of data and execute trades in milliseconds. Their speed and precision significantly surpass the capabilities of human traders, making them extremely useful in the volatile Forex market, where prices can change in the blink of an eye. A human trader can be slow to act, turning a profitable strategy on historical data into a losing strategy when executed in the live market. A trading algorithm can automatically execute a strategy so there is no delay and increased profitability.

Emotionless Trading

Many human traders struggle to follow their trading strategy as their emotions prevent them from making good trading decisions under pressure. Algorithms operate purely based on logic and predefined rules, removing emotions from the equation. This is a massive benefit in trading, where emotional decisions can lead to poor judgment and trading mistakes.

Consistency and Discipline

Human traders tend to override their strategies to achieve better performance, but this usually backfires. Algorithms ensure the trading plan is followed perfectly, bringing consistency and discipline to the trading process. The trading algorithm does not let fear, greed, or bias impact trading decisions and will only enter or exit trades when the predefined conditions are met.

Ability to Backtest

Forex traders can backtest their algorithms on historical market data to verify their effectiveness before using live trading. Backtesting enables traders to refine their strategies and minimize potential risks. While historical data and future market patterns are not the same, backtesting can be very helpful in finding profitable trading strategies.