Nearly 30 years ago, the Forex market was characterized by trades that happened over the phone, investors that were institutional, opaque prices that were used for information, and the distinction between the trading and the dealer-customer trading. But now, with new technological advances, it offers more transparency, and more distinction between the dealers and the customers, which has been minimized.
The algorithm has also changed too, but it does pose a few risks as well. Here, we’ll discuss the basics of the forex market, and the algorithm that comes with this.
The market works with varying volumes that are based on a quoted and a base currency, which is the given price on a quote currency. Forex is considered a large and liquid market. The average of this daily is usually about $3 trillion a day, and it’s conducted in all of the major currencies, and it involves many players. This is a good one for foreign goods and services, but some may do speculative trading, and it can affect the real exchange rates too, since the output, use, inflation, and the capital flows come from this.
The forex market uses algorithmic trading, which is basically a bunch of rules designed for this kind of market.
There are four different types of forex algorithmic trading. That is statistical that is a strategy that loos for the profitable trades that come based on different time series data. Then there is auto hedging, which is where rules are made to reduce the exposure to the risk. Another is the algorithmic execution, which is where predefined objectives are put in place, such as those to reduce the impact of a market or to execute trades that happen quickly. Finally we have direct market access which is the optimal speeds and the lower costs of this trading that traders can access and connect to multiple platforms.
One of these subcategories is the high frequency trading, which is the extremely speedy trade order executions and the rate surrounding it.
This gives advantages to the traders, including the ability to make trades within milliseconds of incremental price changes, but also to carry risks when trading in a volatile market.
This type of trading does use algorithms that automate the process and will reduce the hours that are needed in order to conduct the transactions. The efficiency of this is created to help with these processes, including the execution of various trade orders. The automating of this process is based on predetermined criteria, including executing orders that happen over a specified period of time or a specific price, and is much more efficient than the manual executions as well.
Banks have also taken advantage of this, and they’re programmed to update the prices of this too. The algorithms will increase the speeds on the market price quotes, while also reducing the number of working hours needed to quote these prices.
Some banks will program this to help with reducing the risk exposure. The algorithms will be used to sell specific currency in order to match a person’s trade by their bank in order to maintain a constant quantity of that specific type of currency. This also allows for a specified level of risk exposure for this currency.
These typically mean lower transaction costs. But they aren’t the only factors. The algorithms also are good for speculative trading, since they happen, and they give the person a chance to interpret the data quickly so that it allows for people to find those arbitrage opportunities that come from price devaluation.
So the algorithms help with trade, and they’re based on how it’s going and the future of that currency.