There are essentially two ways of forex trading. You can use either algorithmic formulas and software that automates and manages your trades for you or you spend the time manually reviewing data before deciding to make your trade. There are positives and negatives to both approaches, but using algorithms should give you an edge over more traditional fundamental and technical analysis and allow you the opportunity to do several things that are either time consuming or difficult to do by yourself.
Algorithms are able to spot trends 24 hours a day, so you can gain an advantage if when you are not at your desk and watching the markets. Even if you already have a definite trading strategy, an algorithm can duplicate whatever mathematical model you currently use to spot trends even when you’re asleep or away from your computer.
A computer basically never tires of working for you and it can simplify your life, allowing you to be twice as productive. Sure, there’s an initial upfront cost to have a computer monitoring the markets for you, but in the long term it will pay for itself if your strategy is profitable.
Emotion is an integral part of human nature but in the context of trading markets, your mood can create an erratic trading pattern and this is an area where automated trading by your computer can have a big advantage. Computers don’t care for emotions and neither do markets so by using an algorithm you eliminate one of the hardest things for an investor to control.
Your trading software will execute a trade based on the rules you have defined, that’s it. You remain in control of what your computer does on your behalf and it won’t buy into a feeding frenzy or sell on fears of a meltdown.
Computers make automated trades much faster and are more efficiently than we can manually which means that money turns over much faster and liquidity improves using an algorithmic trading platform.
In theory as more traders look to adopt algorithmic-based trading, market volatility will decrease as all programs tend to try to execute trades in the most efficient manner. Eventually, with tighter spreads and less overall volatility, the best ways of profiting from the forex market will be by using computers that can analyze large volumes of data quickly, spot any trends, and then make trades with lighting-like speed and extreme accuracy.
Flexibility & Profit Potential
The days of the “black box” algorithm are almost at an end. Traders used to be concerned about using standard third party software because if you can’t determine how the trades are being made, and you can’t modify the algorithm over time, then the software may eventually become useless.
So-called “white box” software now exists so that you can modify the algorithm to suit your own personal style. If you don’t want to build a trading system from scratch, you can use something “off the shelf” and make adjustments over time to see what works best for you. The inherent flexibility of these kinds of programs only increase profit potential for you while simultaneously reducing risk.
Guest post contributed by Jane Spencer, a freelance forex currency trading writer, on behalf of Sunbird FX. All views and opinions expressed are those of the writer and do not necessarily represent Sunbird FX.