A Deep Dive Into Forex Algorithmic Trading & Techniques

Forex algorithmic trading could provide traders with much needed help in navigating complex markets.

By Marcel Deer

Edited by Dragan Stevanovic

Published November 20, 2024.

a computer monitor sitting on top of a desk with forex trading chart

﻿Algorithmic trading is growing in the forex trading space. In 2022, algorithmic trading accounted for almost 75% of all spot forex trading, according to BNP Paribas.
One of the reasons for such popularity is that forex algorithmic trading allows the rapid execution of trades across currency pairs. This means that traders could enjoy automated, currency trading across multiple markets.
Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of instruments themselves. The information in this blog is purely educational and should NOT be considered advice.
﻿
What Is Forex Algorithmic Trading?Forex algorithmic trading uses computer programming, AI algorithmic trading, and automated processes to execute trades in the forex market. These algorithms automatically analyze market data and trade based on preset rules and parameters.
There are a few reasons individuals consider using algorithmic trading in currency markets:
Algorithms can execute trades instantly, at sub-second speeds. 
Traders have 24/7 access to trading across different markets and time zones.
 Algorithms eliminate emotional trading bias since trading happens under predefined rules.
Available historical data could improve the accuracy.
As with all trading, algorithmic forex trading still comes with a few risks that need to be weighed and considered, such as the following:
Technical failures in hardware and software
Overfitting (identifying false patterns through hindsight bias)
 Inherent market risks relating to volatility and the fact that nothing in the trading markets is guaranteed
To mitigate these, regular system maintenance, backup, and risk management are a must. It's also a good idea to implement stop-loss orders to limit losses.
6 Techniques for Forex Algorithmic Trading1. ScalpingScalping utilizes small price movements to achieve small potential profits/losses on regular trades. The algorithms identify entry and exit levels within seconds or minutes thanks to tight bid-ask spreads and high trading volumes.
Scalping is often used in high volatility events—geopolitical events, oil price fluctuations, and company news—since it could trigger price movements suitable for quick trades.
2. Mean ReversionMean reversion trading rests on the assumption that the price value always eventually reverts to the mean price. That is why, with this approach, traders buy a currency when it's below its average price and sell it when it's above.
Common indicators for mean reversion are Bollinger Bands, relative strength index (RSI), and moving averages.   ﻿
3. High-Frequency TradingHigh-frequency trading (HFT) is an automated technique that analyzes multiple markets and rapidly executes a large volume of trades, prioritizing high speed and efficiency for potential short-term profits.
Although HFT is a highly effective execution strategy, the main concern is that traders with the fastest execution speeds are usually more potentially profitable, which leaves other HFT traders in a potentially volatile environment afterward.
4. Machine Learning and AIAI technology and machine learning (ML) algorithms use advanced statistical models that analyze enormous data sets to identify trading patterns. As more data is fed to the algorithms, the accuracy of their forecasts increases.
However, bear in mind that trading environments are highly complex, and human oversight is still very much required for reasonable growth.
» Find out more about AI in Forex and possibilities in currency markets﻿
Implementing Forex Algorithmic Trading StrategiesTo select the right platform for algorithmic trading, make sure the following factors fit your trading strategy:
 Order management: The platform should provide order management tools (like stop-loss and take-profit orders), trailing stops, etc.
 Speed: The platform should be able to handle the volume of trades you request as fast as possible to minimize the potential of wasted timeframes.
 User interface and customization: The platform should have a user-friendly interface that comes with customization features to help improve your experience.
 Technical support: Reputable platforms should provide a level of customer support to help navigate the more complex areas of algorithmic trading.
Platforms like MetaTrader, NinjaTrader, and TradeStation have strong reputations in algorithmic trading.
If you want to take it a step further and develop your trading algorithms, learn the basics of programming languages such as R or Python. Look up online tutorials and courses to code simple strategies.
You should adapt your algorithms as the market changes, and re-evaluate strategies in a rapidly evolving market. Make sure to backtest them with historical data and use the results to further refine and optimize algorithms.
» Wondering what other tech there is? Learn about emerging technologies.
Forex Trading on Auto-PilotForex algorithmic trading is now a big part of currency trading. If you want to start or continue your forex trading journey, algorithmic trading could bridge quite a few drawbacks of traditional trading.
It lets traders use automated algorithms and boosts trade speed and efficiency in the foreign exchange market. Moreover, these tools provide 24/7 access to global markets.
As with all trading, algorithmic forex trading doesn't mean you should just let the machines do all the work. Before committing to any trades, do your research and understand the risks.
﻿