THE GUIDE TO HIGH FREQUENCY FOREX TRADING

WHAT IS HIGH FREQUENCY FOREX TRADING

The forex industry has been around for decades. Over the years, more and more traders have entered this industry in search of an easy way to earn profits. Several strategies, tools, and indicators have been developed in order to aid traders in their journey to making minimum-risk investments. Similarly, high-frequency forex trading is also a strategy to earn quick profits. Oddly enough, not many traders know about this forex trading strategy. In fact, until recently, I wasn’t aware of its true benefits either.

High frequency forex trading refers to executing an extremely high volume of trades and closing them within milliseconds. This strategy requires the use of special computer systems as a human is unable to achieve these rates on their own. The high frequency strategy works with several algorithms to predict when the market is going to fluctuate before it even happens. This strategy causes the markets to become extremely liquid for a short amount of time which can confuse other traders on why this occurred. So if you ever see a small period of very large liquidity, just know that someone somewhere is using the high frequency forex trading strategy.

HIGH FREQUENCY FOREX TRADING STRATEGIES

High Frequency Forex Trading Strategy
High Frequency Forex Trading Strategy

There are a couple of different strategies you can use to achieve high frequency forex trading. These strategies have been in use by large organizations for quite some time now. They are explained below:

ARBITRAGE

The arbitrage strategy relies on the price difference in exchange rates in order to make their profits. It involves buying an asset in one market and selling it in another. The forex industry switches between a couple of different markets with each time zone. These markets include Tokyo, London, New York, and Sydney. Let’s assume that we’re currently in the London market and the Euro has depreciated quite a bit. We take this opportunity to buy a large amount of Euro positions. When the London market switches to the New York market, the price of the Euro would increase and we can take this opportunity to sell all the positions we bought previously. 

MARKET DEVELOPMENT

The market development strategy is one of the most popular strategies used by large organizations and businesses for a very long time. It involves increasing market capitalization. This is done by opening very large bids and questioning in a single market. This strategy will assist traders in obtaining quotations for these large bids which will then help them make a profit through the spreads of these positions. 

PINGING

Pinging is another strategy that is super common among large companies and businesses. To be fair, the entire high frequency strategy is only common among large companies and it is simply because the type of system you require to perform this strategy is very pricey. With the pinging strategy, you have to place a couple of small orders within a bid stream. If these orders are accepted, there is a great chance that this bid is also holding a secret large order. If so, the algorithm will be able to trade with minimum risk. This is because it would have a much better market understanding. 

BENEFITS OF HIGH FREQUENCY FOREX TRADING

Now there obviously has to be a reason this strategy is so popular. No one spends a ton of money on a computer system if they aren’t certain the strategy is even going to be profitable. One of the biggest benefits of high frequency forex trading is that it significantly improves market conditions by making the market more liquid which improves stability. Once the market becomes liquid, money from orders can be transferred much more efficiently. This reduces spreads and may also eliminate arbitrage possibilities. Although we wouldn’t let our ago admit it, robots have definitely helped make our lives so much easier. You can get consistent profits with the minimal human effort required. 

RISKS WITH HIGH FREQUENCY FOREX TRADING

It is also important to note that the high frequency forex trading strategy does not work for everyone. This is also why it is mainly performed by large businesses and organizations that don’t have much to lose. This strategy is unfair to the rest of the players in the market as it shows that if you lack funds, you can’t play the same game. It makes the market extremely volatile due to the fast executions and closes of a large number of trades. The market can suddenly collapse which would make the rest of the players suffer immensely. Flash crashes and sell-offs may even result in your broker banning you if they don’t allow the high frequency forex trading strategy.

HIGH FREQUENCY ALGORITHMS

The computer system that performs the high frequency forex trading follows an algorithm that helps them identify the best time to perform this strategy. There are a couple of different high frequency algorithms. They are explained in more detail below:

STATISTICAL

The statistical algorithm of high frequency forex trading focuses on historical and past data. It uses this data to perform statistical analysis which helps it understand what is the best trade to execute and the best time to do so as well.

AUTO-HEDGING

The auto-hedging algorithm of high frequency forex trading is responsible for preventing and minimizing risk exposure. It makes sure that whatever deal you perform is done with minimum risk involved and therefore, gives you a great chance of performing risk-free trades.

EXECUTION STRATEGIES

The execution strategies algorithm of high frequency forex trading comprises of several different algorithms built into one. Each of these algorithms is responsible for a certain task or purpose of high frequency trading. Some of the tasks include minimizing market effectiveness, speeding up transaction executions, and many more.

DIRECT MARKET ACCESS

Sometimes, another platform may be able to offer much better trading platforms than the one you’re currency on. The direct market access algorithm of high frequency forex trading is responsible for allowing you to access and switch between different platforms more quickly and efficiently for a better chance at favorable market conditions.

FREQUENTLY ASKED QUESTIONS

IS HIGH FREQUENCY FOREX TRADING A NEW CONCEPT?

High frequency forex trading is a really old strategy that has been performed for decades now. 

CAN ANYONE USE THE HIGH FREQUENCY FOREX TRADING STRATEGY?

While this strategy is open for anyone to use, it is important to note that the computer system required to perform this strategy is super expensive and therefore, usually only large organizations are seen performing it.

CAN HUMANS PERFORM THE HIGH FREQUENCY FOREX TRADING STRATEGY?

The high frequency forex trading strategy requires opening a large number of positions and closing them within milliseconds. This is impossible to achieve as a human and requires the use of a computer system to do so.

CONCLUSION

The high frequency forex trading strategy can be very profitable with minimum effort involved as a computer performs the entire strategy. However, it is a really expensive system and so we only recommend it if you’re certain about the profitability of this strategy. Some traders refuse to use this strategy as they believe it is unethical and unfair to the rest of the traders as it creates unstable market conditions and harms the trading strategies of other investors. This strategy is responsible for several market collapses and should only be performed wisely.

To know more about different types of trading strategies let’s check out “21 Advanced Forex Trading Strategies” and develop your trading strategy to the next level.

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