There exists many myths about algorithmic trading. Some of these myths leaves individuals with the narrative that Forex traders has a variety of secrets that is making them rich. Fortunately this is far from reality. Put in a simple way, Forex traders just want to trade the market with their best possible abilities. Thus, using algorithmic trading in a Forex strategy is most of all a matter of simplifying their work and making it more efficient. By implementing an algorithm into a computer we must never forget the most important fact. The computer is only doing what we tell it to do!
A good performing alorithm is defined by a likewise good performing trading strategy. This implies, the better the trading strategy defines the market activity, the more efficient it can be implemented. In this way, the mystic athmosphere that some like to relate to algorithmic trading, doesn’t exist. Likewise, there is no magic connected to market activity performed by the machines. The only “magic” we can think of is superior skills and excellent analytical skills among the persons who are implementing it.
Therefore, everything starts with a solid Forex trading strategy. The better both monitoring of the market, entry- and exit points are defined, the better it will be present as a computer based trading system. Furthermore, it is essential to have a clear definition, and also a very clear mind, about what exact functions the computer will be set to perform.
How can algorithmic trading improve the performance of a trading strategy? In some cases it is a wish to create a computer based trading system that is “set and forget”. In other cases there is a wish to include AI and machine learning features. Common for introducing algorithmic trading is majority two distinct situations.
A faster and more accurate entry to and exit from the market is a major motivation for using algorithmic trading. Without any doubt, a computer can enter and exit the market much faster than the human mind. Provided that the trading strategy includes scalping features, the speed is certainly also of importance. High frequency trading model, entering the market in a fraction of a second, could never be made by humans in any case.
Eleminating human emotions in trading is another motivation for using algorithmic trading. Far to often has the world seen traders failing because they are trading “on a hunch”. Intuition should not be a part of any trading strategy anyway. Implementing a clearly defined market entry into a computer based system will guarantee the same performance on each occurance. And of course it should be followed by the same accuracy in the exit from the market.