What is High-Frequency Forex Trading?

The transformation of one type of currency into another currency is called Forex or Foreign Exchange. It is one of the most traded financial derivatives in the world. The trading volume in forex is average $5 trillion to $7 trillion

History of Foreign Exchange trading

The practice of forex trading has been performed since the ancient period. The people used to change their currencies whenever they visited another place. Different rulers had different forms and types of currencies, which were not acceptable in other emperors’ states.

Therefore, the concept of changing the currencies arose. At that time, usually, goldsmiths and silversmiths were the ones exchanging them. 

Later in the 15th century, the banks started to operate. And it soon became the place for the currency exchange. In no time, forex markets started to operate.

The modern forex market is considered to have started around 1850 when international trade was flowing, and the currency exchange was very popular. This led to the development, and eventually, during the 1970s, we got a perfectly active and functional foreign exchange market.

What is High-Frequency trading? 

High-frequency trading or HFT is basically trading based on algorithms. This means it is that bundle of rules and formulas which are to be followed in order to get the answers in computations. 

Characteristics of High-Frequency trading

Following are the main features of HFT-

  • A large number of transactions.
  • Trade executions are super-fast.
  • The term of investment scope is very short.
  • Rapid cancellation of the orders.
  • Slim profit margins. 
  • At the end of the day, the positions of the traders are closed. 

High-frequency trading is way too multifaceted the normal trading. And to achieve high-speed transactions, a particular kind of computer is used.

These special computers use algorithms to examine the upcoming new market trends in fractions of seconds. 

Advantages of High-Frequency trading 

The algorithm or the process which makes these complicated trading possible allows the traders to take benefits like- 

  • More Profit

Even from the slight price movement, the traders can make extra profits and returns, which are not possible in the case of ordinary trading. 

  • More Opportunities 

HFT allows the investor to evaluate more exchanges, markets, and other financial derivatives. It gives you more options and openings for trades. 

  • High Liquidity

It is studied that the HFT is capable of increasing the market liquidity. With the high-speed transactions, the volume of the trades also rises, and this further results in the growth of market competition. This makes the liquidity and market more effectively. 

  • Reduces the Risk

Trading is all about taking high risks. But with HFT, the risks are minimized. With high liquidity, the risk is reduced. This happens because, during a trade, another party will be present on your opposite side. In addition to this, the price at which the buyer and seller want to trade becomes more desirable.

  • The Remaining Risk Can Be Alleviated as Well

You can use the stop-loss order, which will prevent you from incurring more losses. Also, there are certain strategies and techniques through which you can lessen the extra risk. 

What is High-Frequency Forex trading?

The high-frequency forex market is when the HFT is applied to the foreign exchange market. When the forex trading market uses the algorithms or applies the rules in order to forecast the market trend, it is called high-frequency forex. It came into existence in 2005

How do you Forex High Frequencies? 

The advent of high-tech systems and technologies has taken over the exchange market as well. Through these systems, such computers and types of machinery were built, which can help to solve even the toughest algorithm.

High-frequency forex trading can be said to be a substitute for the private mentors, which help and assist the traders in forming a better judgment of the market. 

The HFT in forex works through algorithms that evaluate the whole market trend, its data and assist in predicting the future of the asset with the help of some indicators. 

The operation of high-frequency forex trading depends on the algorithms, so it becomes important to understand the basics, types, and functions of these sets of rules. 

Algorithms 

Algorithms are those rules which are made to achieve a task. It could be for calculation purposes or for trend analysis. They are formed on the basis of quantity, the timing of the trade, etc. 

The algorithms are classified into four classes- 

  • Direct Market Access 

This algorithm allows the traders to use different or multiple trading platforms. 

  • Execution Strategies 

A set of rules are formed to achieve a certain task. It could be for fast transactions, reducing loss, or any other as per the need of the programmer. 

  • Auto-hedging 

Hedging is the strategy that is used for reducing the risk. The auto-hedging algorithm is made so that the potential loss can be stopped.

  • Statistical

This type of algorithm studies the previous data and based on that, provide the profit openings. 

It is to be noted that all high-frequency trading networks use the algorithms, but it is not necessary that all algorithm trading is based on the HFT. 

Role of algorithm in High-Frequency Forex trading 

High-frequency trading can use all these kinds of algorithms to achieve a high volume of trades with risk management strategies. 

The use of such algorithms has reduced the time required in forex trading and has built a strong base for future trading scenarios. This has also led to a reduction in the costs of trade executions. 

Ordinary forex trading is less effective and competent in comparison to forex HFT because of the latter works on the prearranged conditions of the trades. 

The algorithms are very helpful in the speculative trading since it has the ability to construe the marketing data and execute the trade quickly. Also, it makes the cost of the contract less and efficient. 

Banks and algorithms

Some banks have started to adopt the concept of algorithms because it helps in maintaining the quantity of the currency sold by the bank and bought by a trader. This decreases the risk of occupying the currency. 

How to get algorithms?

The use of the algorithm is limited up to large companies because this system is not something you can get at an affordable price, and hence not everyone has the resources to use this.

If you are not a programmer or do not know how to make one, the best option is to buy good software from an authentic source. One thing to keep in mind is that you cannot go with bargaining here. If you want to get one, take the most reliable software. 

Cheap and bargained software are not always authentic, and it might be just a scam. Invest more to get a better and dedicated algorithm that can provide real benefits. 

The rates can be weekly, monthly, or yearly. The basic version starts at $5000 per month and can go up to $10,000 to $25,000 per month.

Is there any risk involved in algorithmic Forex HFT?

With every pro comes to the con, and here as well, there are some risk factors associated with this concept.

  • Imbalance in Algorithms 

The technology difference can cause unevenness in liquidity. Since some traders have the provisions to use highly advanced algorithms, they can execute trades quickly and can predict the future much accurately. 

However, others do not have such resources, and hence, this causes an imbalance in algorithms resulting in fluctuation in the market and its liquidity. 

  • Escalated Volatility

The algorithms react to the market trend quickly. Therefore, in the case of a volatile market, the algorithms cause the bid-ask spreads to amplify, which can stop the trading and affects the market liquidity. 

  • One Misbehaved Algorithm Can Lead to Loss

It is now evident that the algorithms work in a very swift way, and many investors rely on them for their success. This implies that even a slight mistake in algorithms can cause the loss of millions in few seconds. 

How to trade High-Frequency Forex?

You can start executing your trades in HFT after following the training guide provided here:

  • #Step 1 – the first step is to find a suitable broker who serves the HFT. Not every broker has the facility of high-frequency trading. 
  • #Step 2 – if you are new to the brokerage firm, learn and grasp the functionality of the trading terminal. Make sure you check all the features and tools related to it. 
  • #Step 3 – get your software or the algorithm. Many brokers provide the facility, and you can purchase directly from them. You also have to buy the APIs that are the application programming interfaces. 
  • The role of API is to simplify the communication system between the software and the traders. 
  • #Step 4 – start trading. After getting all the things done, you can finally start to execute your trades. Remember, do not trade without grasping the concept of HFT. They sure provide benefits, but one wrong step can make you suffer losses.

Is High-Frequency Forex profitable?

The general perception is that the fast and quick any trade execution will, the more profit will be generated. So, in affirmation, we can say that the HFT in forex is profitable

In HFT, algorithms perform their magic and execute the trade within seconds. And because of this, even a minor price change can result in profit.

It also cancels out the small bid-ask spreads and increases the liquidity in the market. And this has already profited many companies. In addition to these, high-frequency trading is also said to have a large turnover ratio.

What is the difference between Forex and High-Frequency Forex?

The difference between these two types of trading is the use of algorithms. One uses the manual or ordinary form of trading while the other one is advanced and involves high computation.

Let us understand forex and high-frequency trading for better comprehension. 

#1 Forex Trading

Forex or foreign exchange trading is the buying or selling of currencies. Also called FX trading, it is the conversion of one type of currency into another. 

Forex Trading is when the traders buy and sell currencies at a set price. Through this means, the banks, investors, and other companies or industries transform the currencies which make traveling in other countries possible. 

How does FX Market Really Work? 

The trading of currencies takes place absolutely between the buyer and the seller. These are the two parties to the contract. Other financial derivatives like commodities or stocks are conducted on the exchange market. But not the forex. 

The grid of forex covers the main four trading markets around the globe. they are- 

  • New York Exchange
  • Sydney Exchange
  • Tokyo Exchange 
  • London Exchange

And because the activity times when these markets operate are different, the currency can be traded 24 hours a day. 

How Foreign Exchange market fluctuates?

Forex trading is the buying and selling of currencies from all around the world. Many external and internal factors can cause movements in these currencies like the demand and supply, market gush, financial news or event, the central banks, etc. 

Types of FX Market

The foreign exchange market has three types- 

  • Spot Forex market  

Also known as foreign exchange spot transaction, it is that contract of buying and selling of currency that is made at the current rate. It is done ‘on the spot’ that is when the trade is established. 

  • Forward Forex Market 

This type talks about the buying or selling of currency at future dates. The forward FX market is that contract in which both the parties agree to trade the currency at the settled price in the upcoming future dates. 

  • Future Forex Marketing

In this contract, the time, date, and contract size are pre-determined. The buyers and sellers have to make the trade according to that agreement. This is more binding in nature. 

Advantages of Forex trading 

  • Easy to trade

Even a beginner can trade the forex market with ease after learning a few basic aspects of trading and the platform in use.

  • High liquidity

Forex has high liquidity because the foreign exchange market is huge and consists of many active traders. This makes the manipulation of prices difficult. 

  • They are Independent

Forex market is not related to other financial derivatives, meaning thereby that any event fluctuating the price of stocks or commodities will not affect the currencies. 

Disadvantages of Forex trading

  • No Regulatory Authority

There is a lack of regulatory institutions which can govern the working of foreign exchange. This makes the brokerage firms to take over. Hence, making the market less transparent.

  • Price Remains Uncertain 

The movement and variations in prices can happen due to many reasons and factors. One of them is international and economical politics which makes the process of determining price complex and uncertain. 

  • High leverage 

More leverage implies that you can get more profits as compared to your trading amount. This applies in the case of losses as well. There is always a risk of losing more than your investment. 

The way out of this risk is to trade the leverage carefully and manage your money accordingly. 

#2 High-Frequency Forex trading

The use of high frequency has immensely risen in the forex market. The forex HFT is based purely on the use of algorithms. In fractions of seconds, say milliseconds, the trades can be performed. It permits you to use and scan different markets altogether. 

HFT in foreign exchange is all about analyzing the market trend and execution of contracts based on that, which increases the volume of trade. As stated earlier, the algorithms are of various types, and the right use of them can generate profits for you. 

Advantages of High-Frequency Forex trading 

The HFT in forex helps to increase the market liquidity, and this makes the flow of money much smooth and fast. It also makes the spreads stiffer timed with a decrease in the arbitrage.

The profits are made from the small movements and fluctuations in the market. This ensures that you will get your fair share of the amount even if there is a big market event. And lastly, with very little effort and examination, you can get steady profits because the algorithms are working for you.

Disadvantages of High-Frequency Forex trading 

The use of algorithms is mostly done by large companies and industries. This is so because the system and programming of these algorithms are expensive, and if you are not a programmer yourself, it is hard to get such a service. Hence, the biggest drawback is that not everyone can afford to use this system.

Moreover, they often make the market more volatile and increase the chances of flash crashes. 

Which is better: Forex trading or High-Frequency Forex trading? 

Both forex and high-frequency forex have their benefits and downsides. You can trade the forex 24 hours, and they fluctuate only when some political, economic, or other factor directly impacts it. 

You can get some help in analyzing the market with much better accuracy with high-frequency trading. This is because HFT programs are made in such a way to study the data so that you can make profits with little movement also. 

Forex trading has its risks which can be minimized by the use of algorithms. But even if you do not have any such system, with proper management and understanding, the currencies can be traded effectively.

In comparison, it would not be fair to pick the one as they are not basically different concepts. High-frequency forex is an overstated form of forex trading and is made only to improve the FX trading experience.

Conclusion 

The use of algorithms in the trading market is becoming an investor’s favorite. High-frequency forex trading is helpful in many aspects and gives a high return if used properly.

The use of HFT is also helping in making the market more transparent. In addition, the different types of algorithms like statistical, auto hedging, etc., can detect any abnormality in the price, which further creates more opportunities for you to gain profit. 

However, high-frequency forex trading has high risks too. However, these can be surmounted by the use of effective strategies which can prevent you from suffering high losses. Hence, the use of algorithms should be done with more caution then only you can reap the benefits.

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