We are all familiar with the word ‘algorithm’, a mathematical expression used to simply equations. This expression as viewed by forex traders has been bestowed upon the forex market to create a model which uses mathematical base to perform transactions in the financial market.
This model sets up few rules to be followed while trading in forex. It determines the optimal time when an order can be placed and also cause the least amount of impact on stock price. So when you’re dealing with large blocks of a stock, the mechanism divides large blocks into smaller blocks and the complex algorithms them decide the time of purchase of those smaller blocks.
Let us try and understand Algorithmic Fx trading in detail.
- Auto-hedging – this mechanism helps manage dynamic risk levels and releases automatically generated hedging order.
- Statistical Trading – it operates under a formula constructed around macro portfolio models.
- Liquidity Access – as the name suggests, this mechanism offers the trader with solutions to trade in multiple sites/ grounds.
- Algorithmic Execution – it offers avenues to control the trade execution with acute sophistication.
In Forex trading, traders use a small amount of cash in an account called ‘margin’ account and the trader then makes use of the leverage provided by the clearer to trade a larger position in the currency chosen by the trader. As the ‘margin’ amount is small, even if currency movement is negligible, you (trader) can experience an overall positive effect on their investment.
Algorithmic mechanism allows traders to make the best out of forex trading with the help of charts and indicator analysis.
How does an algorithmic FX trading work?
An algo trading mechanism enters the market for a short term and then makes a quick exit, thereby offering the investor a quick gain depending upon the environment. The orders identified in such scenarios are known as ‘child orders’.
The controllers of this system can opt to play as an aggressive player hitting bids. Or can make a subtle move by using resting limit orders.
The Algorithmic systems can experience a sudden closure. This is mostly observed when a government report on the Forex market is about to be released.