The financial market is one of the biggest globally, with billions moving every day. It makes it possible to make substantial returns through even small investments, but this also means that you need to be aware of all your options when trading Forex.
One exciting option is algorithmic trading; bots automatically send buy and sell orders based on algorithms programmed by humans. It requires minimal human oversight while still providing much higher performance than manual trading or simple strategies like trend following or support/resistance levels.
However, all these strategies are likely to lose money for any trader who does not use them properly; they work best in conjunction with other strategies and require significant effort to implement correctly. The following list is by no means complete, but it should give you a good idea of algorithmic trading strategies you should be aware of if you want to get an edge in your trading:
Currency Strength Index (CSI)
This strategy combines several indicators to show which currency pairs are showing strong momentum. It will allow traders to avoid trades that have already started losing momentum and thus avoid unnecessary losses while capitalizing on existing trends.
Autocorrelation Trading – This uses the autocorrelation function of various series, such as price time series. The autocorrelation function takes values between -1 and 1; one represents perfect correlation while zero represents no correlation whatsoever. Using the Autocorrelation trading strategy, you can determine whether a currency pair has lost or is likely to lose its momentum.
Forecasting with Moving Averages
This strategy allows traders to enter trades in advance, setting buy and sell orders further ahead in time than would typically be possible. One of the most popular averages used is the 200-day moving average; tracking changes in the price compared to the 200-day moving average allows you to make forecasts with a high degree of certainty about where prices are headed over the next few days/weeks/months/years.
This algorithm uses Bollinger Bands® to detect when a price breakout happens. It then buys or sells at predetermined intervals while the price is still within the bands, using all buy or sell opportunities that occur until the breakout finally happens.
Price Action Forecasting
It uses neural networks to forecast where market prices will go next. This algorithm uses several types of neural networks: feedforward and recurrent backpropagation networks, radial basis function networks, counter propagation neural networks, and adaptive resonance theory.
Price Action Trading –
This strategy uses automated trading systems to set up trades manually instead of using preset entry/exit points as traditional strategies do. It allows for much more flexibility than other algorithmic trading strategies while requiring significantly more work; it does not always provide returns that justify the amount of effort required compared to more straightforward strategies like trend following.
High-Frequency Trading (HFT)
Perhaps the most controversial example of algorithmic trading in recent history was HFT, where traders would deploy computerized systems that were capable of making staggering numbers of transactions per second – usually, these ranged anywhere between ten and fifty thousand – allowing them to spot arbitrage opportunities faster than any human trader could even start thinking about reacting.
Although HFT was primarily blamed for the May 2010 Flash Crash, its uses can be justified given that it has been claimed to have reduced trading costs by about 10% and increased liquidity in the market.
Volume-Triggered (VT) Algorithms
Volume-Triggered algorithms are based on the assumption that if many investors buy or sell a particular asset all at once, it is likely because they believe there has been a price shift within this asset. Thus if you were to monitor such events as they unfold and take advantage of them as soon as possible, you would begin profiting from these trades just like those who initiated them in the first place.
A straightforward example would be buying the stock right after the stock market closes since there are no further trades to drive the price up or down.
One of the main advantages of VT strategies is that they follow strict rules programmed beforehand, meaning you can tell them exactly when to buy or sell something without constantly monitoring the markets.