The Pros and Cons of High Frequency Forex Trading Strategy

High frequency Forex trading or HFT for short is a trading modality that supposes utilizing powerful computer software and technologies that would make it possible to process as many orders in fraction per second as possible. To make the most of the high frequency forex trading strategy, maximum order execution speed is vital.

The technique is quite challenging to uptake. Besides, it may require initial investments to purchase suitable software and programs that ensure enough order execution capacity. However, when utilized properly, it can help traders generate some nice profit.

High Frequency Forex Trading Explained to Beginners

The strategy can be applied not only to the Forex market. It can be used while trading other assets. The main idea is to make the highest volume of traders over the shortest period. The main obstacle is that orders should be executed so fast that only computers can handle the processing at such a high speed. To have a deeper understanding of actually what HFT is, here are some of the strategy’s key features:

• Traded with a high volume of orders.
• Momentum order cancelation or execution.
• Positions are held for seconds.
• All orders must be closed by the end of the trading day.
• Traders deal with thin profit margins.
• Trading algorithms are fueled by data feeds and proximity services.

In other words, every high frequency forex trading strategy represents a specific algorithm that helps users to make market fluctuation forecasts before they occur. The main philosophy is to track small currency pair shifts to make millions of tiny profits per second.

How Does High Frequency Forex Trading Strategy Work?

HFT mainly relies on software and computer programs, which utilize form factors, processors, and applications responsible for the trading algorithm. For this reason, it is very important to use advanced technologies that experts often call “supercomputers”. The main problem here is that not all users can afford to buy such technologies. Initial investments start from $5,000. Which seems quite pricey, especially for beginners.

To make things even simpler, imagine a typical modification of the FX expert advisor. Now, think of it as an advanced automated version with a set of integrated complex indicators to make accurate forecasts and execute millions of tiny traders per second. This is actually what HFT is.

Frequency Forex Trading Algorithm Types

HFT algorithms are never the same, as they are developed differently. They depend on the trading type and preferable tactics. Generally, four major algorithm types apply to high frequency forex trading strategies:

1. Auto-Hedging. The algorithm was developed as an automated strategy that reduces risk exposure.
2. Statistical. Analyses historical data to generate stats and foresee potentially profitable trading opportunities.
3. Execution strategies. This particular type involves a broad selection of different algorithms that can be configured and programmed to meet certain risks.
4. Direct Market Access. The HFT type makes it possible to access several markets simultaneously and perform trades at higher speed with less expense.

Who Can Use High Frequency Forex Trading Algorithms?

Depending on the goals and traded volume, the HFT concept can be used either by individuals or by institutions. No matter who applies the strategy, a user is supposed to have a good technical background along with programming skills. The software for high frequency trading is more complex if compared to baseline Java apps.

Most of the programs are Python-based along with C++ to create faster application structures or R to process data analysis and statistics. Whatever you opt for, you are supposed to have enough development skills to create something really fast for instant order execution.

HFT Strategy Pros and Cons

High frequency trading is obviously not for everyone. Besides, it comes with specific hits and misses some may find crucial.

Pros:

• Enhanced market liquidity.
• Reduced arbitrage and tighter spreads.
• Not dependent on different market movements and changes.
• Automated processes require minimum human involvement.

Cons:

• Too complex for beginners.
• Requires programming skills.
• Calls for an initial investment in software.

Consider the above-mentioned advantages and disadvantages to decide if a high frequency trading strategy meets your needs.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.