Technological advancements have enhanced trading in the forex market. Gone are the days when traders had to spend hours in front of computer screens, scanning for trading opportunities. Hands-free approaches have cropped up that allow traders to monitor how systems analyze and execute trades in the trillion-dollar market.
Likewise, Algo trading is becoming increasingly popular, given the trading strategy’s effectiveness in scanning and executing profitable trading opportunities that often lead to better outcomes.
What is Algo Trading?
Algo trading or algorithmic trading is a trading strategy whereby computers are relied upon to execute orders while depending on pre-set trading instructions. The trading instruction can be based on variables such as price, timing, and volume.
An algorithm is a set of instructions or directions for solving problems. Similarly, algorithms are increasingly finding their way in the financial markets as traders look to gain an edge in scanning and trading.
In the forex market, algorithmic trading leverages complex formulas combined with mathematical models to make decisions. Trading decisions are made based on the analysis of various chart patterns as well as price actions. Similarly, some algorithmic trading systems are programmed to respond adequately to various market conditions, thus ideal for carrying out fundamental analysis.
The fact that algorithmic trading leverages advanced technology sees such trading strategies engage in high-frequency trading. It means that programmed systems can make tens of thousands of trades at any given time while trading various securities, all in the effort to squeeze optimum returns in the financial markets.
Algorithmic Trading Strategies
Algorithmic trading entails setting rules that a computer system relies on to execute trades in the market. Similarly, there are three types of Algo trading strategies that crop regardless of pre-set rules in play.
Price Action Strategy
The algorithmic trading strategy entails an automated trading system being programmed to look and study open, close, high, and low points of candlestick charts. In this case, the algorithm will only trigger a trade when a similar set up occurs as one in the past that led to the desired outcome.
The price algorithm strategy could see a trade opened when the price moves above a set point or if it falls below a given level. It is a popular trading strategy for scalpers who wish to enter and exit trades as many trades as possible at any given time.
With the price action strategy, traders must determine when to enter long and short positions in the market based on price action. Similarly, measures must be put in place to help manage risk, including stop-loss, trailing, and guaranteed stop order.
The price action strategy can be configured according to the market one intends to trade, the time frame, and the trade size.
Technical Analysis Algo Strategy
A technical Algo trading strategy leverages technical indicators such as moving averages, stochastic indicators, and Bollinger bands to ascertain trading opportunities in the market. The algorithm is created to react to various parameters, as presented by the technical indicators.
For instance, an Algo trading strategy could be configured to enter a long position as soon as the 50-day moving average crosses above the 200-day moving average in a 15-minute chart. Similarly, a short position could be triggered as soon as prices drop below the Bollinger band’s lower band.
With technical analysis, the focus is on how technical indicators behave at different price points. In this case, there is less focus on the price itself. For instance, the Relative Strength Index and stochastic oscillators can be used to signal overbought and oversold conditions, levels that present ideal entry and exit levels.
A combination Algo trading strategy relies on both price action and technical analysis to determine trading opportunities. To create a combination trading strategy, a trader would have to define how price action analysis is carried out in an underlying market. Similarly, a grasp of technical indicators and how they are used in the analysis is a must.
In combination with Algo trading strategies, trading rules are set such that long and short positions are triggered based on price action analysis and technical indicators interpretation.
How Can 10% be a reality?
Algo trading is one of the most effective trading strategies as it ensures rule-based decision making. Emotional trading, which often sees traders go against trading strategies, is often averted. Similarly, it is one of the most effective and reliable trading strategies capable of generating a 10% return every month.
The effectiveness of Algo trading in generating 10% returns is depended on several things:
Capital at risk per trade
No single trading strategy guarantees returns 100% of the time. Similarly, it is essential to control risk on each trade with Algo trading. The trading strategy should ensure that only 1% of the trading account is risked per trade.
For instance, Algo trading should ensure that only $20 is risked in an account with $2,000. Conversely, controlling risk per trade is the first step to remaining on course to generating 10% every month while leveraging automated trading strategies.
Reward: Risk defines the amount of money one stands to make on each position triggered by Algo trading algorithms, relative to the amount that can be lost. An ideal reward: risk ration for a guaranteed 10% return every month would be 1.5: 1.
What this means is that one is making 1.5% on all winning trades while only losing 1% on losing trades. It is accomplished by ensuring the profit target is placed a greater distance from the entry than the stop loss.
The number of trades results in profitable outcomes expressed as a percentage of total trades taken. Any algorithmic trading strategy should have a win rate above 50%. Likewise, if the reward rate is 1.5:1, one would be assured of ending up with a significant return at the end of the month.
Algo trading is one of the most influential and profitable trading strategies in the forex market. Human intervention is significantly reduced with the trading strategy, enabling rule-based trading whereby trades are opened based on pre-set rules.
The trading strategy can be relied upon to generate an average of 10% returns every month when proper rules for analyzing entering and exiting the market are used.