Patience and timing are essential components when trading on the forex (foreign exchange) market. It requires intense focus on a broad range of rapidly changing data in order to execute trades at the perfect time. If a trader loses focus or procrastinate for just a moment, they can miss a golden opportunity to capitalise on their investment or find the value of their assets has been significantly reduced.
Missing investment opportunities is understandable, forex prices move rapidly and investors are only human, but what if there is a way to remove the human element. Happily there is – it is known as automated or algorithmic trading.
Traditionally, derivatives investors relied on a mix of key market data, news sources, rumours and gossip, advice from experts and pure instinct when making investment decisions. Now thanks to the internet, critical trading data is more accessible than ever before. What this means is that useful trading information is not only easier to obtain but more of it is available and in real time. Combined with improved automated trading tools, it is for these reasons automated trading is going to play growing role when trading in future.
According to Transparency Market Research, algorithmic trading worldwide will grow to $US21.81 billion by 2026, a compound annual growth rate of 10.2 per cent from 2018. It is a significant increase on the 2016 figure when the market was valued at US8.38bn. Greenwich Associates found that 20 per cent of institutional forex trading volume is done through algorithmic trading. It is expected this will to move closer to half of all trading .
The growth can be attributed to several factors including faster technology and the use of mobile technology. This means investors can access trading tools on the go and trust that the infrastructure is both fast and reliable enough for their trading needs. Demand has also grown thanks to increased availability of easier-to-use automation trading tools. For instance, many brokers that offer MetaTrader 4 and 5 choose to make Expert Traders available free of charge as part of their platforms.
What is automated trading
Automated or algorithmic trading takes place automatically via software tools. Specialised software trading tools can be set to use forex data to create algorithms which can execute forex trades at high frequency and in large volumes when trigger points are activated.
How does automated trading work
Automated trading derives information from a range of inputs or data to highlight and execute trading opportunities. Trading data is typically derived from historical price movements of currency pairs, recognised trading strategies and indicators and data compiled from different financial news sources and social media. Algorithms help investors maximise gains by taking advantage of these sources without needing to do the research themselves.
The advantages of automated trading
Trading automation saves time
Automated trading software means traders no longer have to constantly monitor the market for the right moment to trade. Trading automation software does this on the trader’s behalf, leaving them free to concentrate on their business or other interests.
Automated trading is fast
Automated trading software will execute a forex trade the moment an investor’s trading parameters are satisfied. Removing the manual element of trading increases trading efficiency and greatly reduces risk of slippage.
Automated trading removes emotion risks
Use of algorithmic trading removes the human component from trading. It is based solely on algorithms rather than be driven by human emotions such as fear, greed, and intuition. Human emotions can impair an individual’s judgement when carrying out a trade especially when under pressure. Algorithms depend on sound trading strategies which can be tested and researched before being set as instructions to the software.
Backtesting allows for careful planning
As automation is based on algorithms that use hard data, traders can test trading strategies before executing them. You can't forecast the future but you can test your algorithms to evaluate trading theories before they are implemented in order to get a good good sense of how successful a strategy may be.
While traditional forex trading will continue well into the foreseeable future, trading automation will continue to grow in popularity. In 2019, forex automation will play a bigger role than ever before as technology becomes faster and more reliable, ease of access to automation tools increases and ability to use these tools is simplified. Once people understand its benefits and decide how automation will benefit them, automation may one day become the primary means of forex trading.
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