The High-Frequency Trading (HFT) in forex allows you to trade in high frequency by buying and selling currency pairs just in a matter of seconds. You will buy a high volume of currency pairs using the automatic program from the HFT service provider, and such a program will also calculate other aspects of your forex trades. Here are some important points you need to know about the High-Frequency Trading (HFT) in forex:
- Large companies often use HFT to maximize their profits in forex. HFT is the forex trading strategy that large companies often use, as it helps them to automate their trading activities and maximize their profits. With High-Frequency Trading, they can put large amounts of investments in forex and let the algorithm do the work for them in executing various trading orders in the forex market.
- HFT provides one of the best liquidity options for investors. Many investors use HFT to keep their liquidity options available for them through the forex market. With High-Frequency Trading, investors don’t need to worry about their investments not having good liquidity, as this type of trading strategy can maximize the liquidity options for their investments.
- It uses the algorithmic program to execute the high-volume trades in the forex market. High-Frequency Trading uses the advanced algorithmic programs maintained by the HFT service providers to help investors manage their high-volume trades in the forex market. Of course, the investors can configure their trading preferences before they can let the program execute their high-volume trading strategy in the forex market.
The Reasons to Use High-Frequency Trading (HFT)
Many trading experts have criticized HFT a lot, and among the criticisms of this trading strategy includes the removal of “human touch” when you execute the High-Frequency Trading (HFT) strategy in your forex trading activities. You will leave it to the algorithm to make various decisions regarding your trading transactions in the forex market, so there will be no actual human interactions during your buy-and-sell process. However, despite the criticisms of the High-Frequency Trading strategy, many investors and big companies have their own reasons to use this trading strategy.
First, HFT can help add more liquidity in the market, which helps the forex market to stay active and in healthy price movements most of the time. Second, companies and investors need to use the High-Frequency Trading strategy to maximize their profit potential while minimizing their time and resources to handle the actual trading transactions. And third, it will eliminate the small bid-ask spreads in the market, meaning that it can help increase the value of the overall bid-ask spreads, which can benefit both the investors and the market makers (forex brokers).
What are the Risks of Using High-Frequency Trading in Forex?
With the High-Frequency Trading strategy, you are trading in high volumes using some sort of computer algorithms that no normal trader can ever do when they trade with a manual method. It might be true that this type of higher frequency forex trading can bring more profits for the investors or companies who are using this method, but there are also risks of using the High-Frequency Trading in the forex market. Here are some risks you can get from using the High-Frequency Trading (HFT) strategy:
- It might increase your profit potential, but it will also increase your risk factors. By conducting large volumes of trading in the fraction of a second, you can make plenty of small profits here and there, but you can also lose your investment just as fast. So, it’s not something that you can rely on to give you consistent profits in the forex market.
- The market liquidity is often not real. HFT can provide more liquidity to the forex market, but the liquidity factor itself is often not real. The liquidity will only be available in a few seconds, and it will disappear fast.
- Market crash and price volatility. The more investors and companies use the High-Frequency Trading strategy, the more chance the market will crash because of it. Also, HFT can also cause the currency pair prices to become volatile, which can be detrimental for the regular forex traders who are trying to apply the long-term strategy for their forex investments.
Some Algorithms Available in HFT
HFT programs use various algorithms that you can choose based on your trading preferences. Each algorithm will run certain functions for the automated forex trading activities you are doing with the High-Frequency Trading strategy. Here are some algorithms available in HFT:
- Direct Market Access. This is the algorithm that allows you to get access to multiple forex trading platforms, so you can execute more trades faster, as you are using multiple platforms to back you up. It will also offer fewer expenses for your trading operations.
- Statistical. You can use this algorithm to predict various trades with potential profits for you and execute the trade transactions right away. The algorithm will base its predictions on the past statistics of various currency pairs in the forex market.
- Execution Strategies. This is the algorithm you can use to execute various trades in the forex market according to your own preferences. You will execute automatic trades based on various factors or configurations, and the algorithm program will just follow the configurations you have set to execute various trading transactions in the forex market.
- Auto-Hedging. This is the algorithm type that allows you to reduce the risk exposure in your forex trading activities.
Final Words – Do You Need to Use HFT to Profit Big in Forex?
The answer is no, because HFT is only suitable to use for the big companies and big investors who have plenty of investment funds they can use to trade at high speed and at high frequency. For regular forex traders, this type of automatic trading won’t do much to help them earn the big profits in their forex trading activities.
In fact, it can give you a bigger risk of loss if you don’t have any backup investment funds in place just in case everything goes wrong with your high-frequency trading strategy. Also, HFT is not the best strategy for you if you aim to earn consistent long-term profits from your forex investments, as HFT will only focus on earning short-term profits in the forex market.