The global foreign exchange market started during the 1970s. Soon, with the progress of technology and the internet, the foreign exchange market greatly developed with the introduction of bots. Earlier, only retail traders would manually trade in the market that was prehabited with large firms, international companies, central banks of nations and governments.
However, now, in the present age, many traders leave the task of trading to trading bots and algorithms. This automated form of trading has its potential advantages and carries risks as well. It simply involves putting a trading strategy into algorithmic codes to work automatically without manual trading.
What is Algorithmic Trading?
Not only does algorithmic trading or bots involve opening and closing trades automatically, but they actually analyse and scan the forex market and the currency pairs as per the specifications. In essence, it includes fully eliminating manual involvement and automating technical analysis of price chart activity, indicators, and other processes. EAs, or expert advisors, are the other name for these computer programmes that automatically purchase and sell currency pairs on the market.
Different sorts of traders utilise algorithmic trading to increase the efficiency of their trading. Algorithmic trading is used by scalpers and high-frequency traders to swiftly and impersonally execute transactions. Systematic traders who want to trade according to predetermined exit and entry rules in trading also utilise algorithmic programs.
Advantages of Algo Trading
The Advantages and Benefits of Algo Trading Should Be Discussed First
- Algo trading not only improves order entry speed and efficiency, but it also lessens the impact of human emotions on trading activity.
- There is no possibility of subjective, emotionally biassed judgements in the execution of algorithmic trading.
- As a result, it maintains order and uniformity despite adverse circumstances.
- Human mistake is completely eliminated, and a trading plan’s integrity is maintained. Additionally, algorithmic trading enables traders to objectively backtest and optimise their trading techniques. Based on previous market lessons, a strategy might then be improved to be used under the right market circumstances.
Disadvantages of Algorithmic Trading
Algorithmic trading is not all about glitz and glamour. There are drawbacks to it as well. Whether trading is done manually or mechanically, there is always a chance that you may lose money when the market moves. Trading with algorithms has certain dangers.
- Additionally, there is a chance that traders who employ algo trading for back testing would over-optimize a strategy. Traders are frequently tempted to continually change their tactics after doing a number of back tests. In the end, it results in the development of tactics that are unable to generate income in a real market.
- Additionally, technical malfunctions or other connectivity issues might cause algorithmic trading techniques to lose out on trading chances.
Algorithmic trading applications in MetaTrader5 platform consist of Expert Advisors, trading robots and indicators. The MT5 platform is packed with many free tools for traders to use, especially algo trading tools. Users of MT5 have access to the virtually largest selection of trading robots, indicators, scripts, and other trading programmes available on the market. There are many programmes that are free, but there are also those that you may rent or buy completely.