Beginner’s guide to FX trading strategy: Algorithmic trading

·4-min read
PHOTO: Getty Images
PHOTO: Getty Images

When it comes to Forex, trading a contract for difference (CFD) serves as an alternative for traders who seek more leverage and FX opportunities on different markets. Traders who buy into a FX CFD will come into an agreement to the exchange of the difference between the opening and closing FX prices upon settlement. These prices depend largely on supply and demand.

Why choose FX CFD over pure FX?

With FX CFD, you can:

  • Maximise your capital further by trading on a leverage, which means you only place a fraction of the transaction value upfront. This would also mean that your profits and losses may be magnified.

  • Choose to long or short (buy or sell) on markets based on your speculation, earning returns based on movement and your position.

  • Hedge your current portfolio, offsetting potential losses.

  • Trade 24/5 on one of the largest available markets.

  • Trade for $0 commission*.

However, while there is room for reward in the fx markets, risks are also involved, so an algorithmic trading strategy compromising sound risk management tools and market alert tools will make a difference to your trades.

PHOTO: Getty Images
PHOTO: Getty Images

What is algo trading?

Algorithmic trading is a game-changing feature that uses algorithms, or computer codes and chart analysis, to enter and exit trades based on the parameters set by the trader. It takes human error and emotion out of the equation, integrating statistics into the strategic mix to identify profitable trades based on predetermined criteria.

When used with online platforms, algo trading adds a layer of automation that can help close the gap between casual and experienced traders. It works around the clock, ensuring that your trades are made based on your criteria, in the right quantities and at the right price, even while you are sleeping. Simply wake up and check your trades in the morning.

Some tried and tested algorithmic strategies include:

  • Statistical – looks for profitable trades by analysing historical data.

  • Auto-hedging – uses rules to manage risk exposure.

  • Algorithmic execution – executes a set objective like a quick trade or reducing market impact.

  • High-frequency trading – trades are executed quickly and frequently, enabling traders to act within milliseconds of price changes.

You can also create your own or customise existing ones with a trading platform like IG that has integrated ProRealTime and MetaTrader 4 (MT4). There is definitely no one-size-fits-all algorithm for traders, so it is important to backtest and refine your algorithms against past data to derive the optimal combinations to buy or sell your trades. You can try algorithmic trading on an IG demo account that gives you $20,000 to test your theories and methods before risking your hard-earned cash. If you want to capitalise on an upcoming event, simply set up an algorithm for it, and never miss an opportunity.

With algo trading, you have the chance to seize opportunities and maximise your capital as you let the algorithms work for you. IG international, which is part of IG group, has over 45 years of experience in the trading space and is also licensed to conduct investment and digital asset businesses by the Bermuda Monetary Authority. Start trading with IG today.

This article was written in partnership with IG.

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