Banks have also taken advantage of algorithms that are programmed to update costs of currency pairs on electronic trading platforms. Actually an algorithm is essentially a set of specific rules designed to complete a clearly defined task. The subcategories of algorithmic trading is high frequency trading, that is characterized by the extremely high frequency of trade order executions. Now look, the goal of algorithmic execution strategies is to execute a predefined objective, similar to reduce market impact or execute a trade quickly. Statistical refers to an algorithmic strategy that looks for profitable trading opportunities on the basis of the statistical analysis of historical time series data. Furthermore, there exist four basic kinds of algorithmic types trading within financial markets. Autohedging is a strategy that generates rules to reduce a trader’s exposure to risk.
Forex is the virtual place in which currency pairs are traded in varying volumes as indicated by quoted rates whereby a base currency is given a price looking at the a quote currency. Operating 24 hours a day, five days a week, Forex is considered to be world’s largest and most liquid financial market. Now pay attention please. Per the Bank for International Settlements the daily global average volume of trading in April 2013 was $ 0 trillion.
While leading to lower transaction costs, these processes been made significantly more efficient by algorithms. There are not one factors that been driving the growth in Forex algorithmic trading. While making significant improvements to the functioning of Forex trading, one particularly significant change is the introduction of algorithmic trading, that, in addition poses lots of risks. Should be used to sell a particular currency to match a customer’s trade in which the bank bought the equivalent amount to maintain a constant quantity of that particular currency. That’s where it starts getting very serious. They may not respond quickly enough if the market were to drastically change, as algorithms are programmed for specific market scenarios.
While there’re fundamental differences between stock markets and the Forex market, there’re some who fear that the high frequency trading that exacerbated the stock market flash crash on May 6, 2010 could similarly affect the Forex market. To avoid this scenario markets may need to be monitored and algorithmic trading suspended during market turbulence. It also comes with new risks, as with all areas of life, new technology introduces many benefits. One such process is the execution of trade orders. Efficiency created by automation leads to lower costs in carrying out these processes. Of course much of the growth in algorithmic trading in Forex markets over the past years is due to algorithms automating certain processes and reducing the hours needed to conduct forex trading transactions. One such downside relates to imbalances in trading power of market participants. So there’re algorithmic trading has made many improvements.
So primary reason for the Forex market’s existence is that people need to trade currencies with intention to buy foreign goods and services, albeit speculative trading can be the main motivation for certain investors. For currencies to function properly, they must be somewhat stable stores of value and be highly liquid. Reducing the costs of trading currencies, it has also come with some added risks, algorithmic trading is able to increase efficiency.