Algorithms in forex, we’ve all heard of them. But what exactly is this algo trading, how does it work, and what’s the difference between algorithmic and classic trading? Let’s take a look!
What is Algorithm in Forex?
Algorithmic trading is basically what it sounds like – the execution of forex trading strategies and transactions based on algorithms. Instead of executing trades manually, you use programming languages (C#, JavaScript, C++, Go) and special software to create robots, which will open and close trades according to your set rules (such as points of price movement) in the market. Once current market conditions match your criteria, a forex algorithm will automatically execute a buy or sell order on your behalf. Convenient, isn’t it?
Depending on the kind of automation you desire, you can choose fully automated, semi-automated, single-action or panel algorithms.
Fully automated algos open and close positions based entirely on your algorithmic strategy. This type of forex algorithm is basically all-encompassing and the most popular, for example, on the cTrader trading platform.
Semi-automated algos (also known as trading assistants) help you to identify potential trades but still allow you to make the final decision on whether or not to execute the trade. Basically, a combination of automatic and manual trading.
Single-action (script) algorithms are the simplest forex trading robots that only fulfil a certain function assigned to them, as opposed to trading 24/7. For example: close all positions upon reaching a certain condition. Minimal, but can be pretty effective.
Last but not least, panel algos are nothing short of UI functional elements. For example: a “New Order” button with pre-determined order settings for quick transactions.
Why Use Algorithms in Forex?
So why do we opt for algorithmic trading? Is it really that much better than manual trading? Truth be told, one is not better or worse, but automatic trading does offer certain benefits.
- High Rate of Order Execution 24/7
Algorithmic forex trading allows you to execute a large volume of orders efficiently 24 hours a day, seven days a week.. Because robots don’t sleep, right? The number of trades that would need days to be executed by a human can be done with algos in a matter of milliseconds.
- No Emotions or Errors
From fear of loss to fear of missing out, human emotions are complex and often result in poor trading decisions. Automatic trading means that your strategy is followed regardless of the temporary ups and downs of the market. Because we’ve seen time and time again that whoever is able to keep a cool head and stick to their guns is the one taking home the profits. Additionally, an algorithm in forex has no possibility of human error with wrongfully placed orders, mistyped lots, etc.
-Successful Analysis and Backtesting
One of the greatest perks of automated trading is its ability to apply trading rules to historical market data to determine the potential success of a trading strategy. This means that the trader can test his or her algorithm on previous forex market conditions. For example, you can launch your robot on last month’s market data to see what the profit would have been if your robot was active back then and make a prediction of your strategy’s future success based on that. Several trading platforms, including cTrader, have an in-built backtesting mechanism precisely for this purpose.
-Diversification and Time Saved
When it comes to manual trading, it can be increasingly difficult and time-consuming to trade several symbols at the same time while using different trading strategies. Algorithmic trading allows you to use multiple strategies and accounts at once, thus spreading the risk across any number of asset classes and investment instruments because you don’t have to monitor every single one. This typically sums up for reduced risks and improved margins. Additionally, there’s the obvious time saved that comes from not having to monitor forex markets every second.
-Protection from Broker Price Manipulation
We all know that there are forex brokers out there who resort to price manipulation. This is not possible with the cTrader STP platform but is possible with many others. So what can help you deal with that? Yes, it turns out that algorithmic trading can actually protect you from these malicious actions! Typically, forex brokers drop the price down to hit all stop losses of traders. Enter your algo! Instead of putting stop losses, you can use a trading robot that will close the position for you. The algorithm of a trading bot is not visible to a broker, so they won’t be able to trigger your stop losses, eliminating stop loss hunting.
How Do I Get Me a Trading Robot?
Getting into the forex algorithmic trading club is not as difficult as it may seem, especially if you choose a platform with a huge community of users like cTrader. You can find free trading robots on ctrader.com and other websites, find a qualified algo developer to build one for you via trading forums (like the cTrader forum) or, if you are familiar with coding, create one yourself! Algorithms can be written on C#, JavaScript, C++ or Go language. Personally, we suggest going for C#, because it has the highest speed of command execution. You can find out how to code on C# via a number of YouTube videos available out there, many of them made by cTrader users.
But really, is creating an algorithm for forex so hard? That depends. Don’t forget that first and foremost, it all begins with an idea. A robot is not a fix-all go-to because at the end of the day, it only follows your instructions, so you need to make sure you have a legitimate strategy in mind as well as set quality rules. The way to do so is to rigorously backtest your robot, experimenting with different settings and trying it out on historical data. While there is no guarantee that the forex algorithm will behave in the same manner in today’s market conditions,it is a very good way to minimise your risks.
Want to learn more about an algorithm in forex? There are plenty of educational materials out there to get you started on the journey, from articles to YouTube videos, Telegram chats and more.
... Deleted by UFO ...