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Disadvantages of Algorithmic Forex Trading
Written by: PaxForex analytics dept - Wednesday, 11 October 2017 0 comments
Modern trading requires modern solutions. The days when telephone conversations were required to complete trading operations, are far behind. Information technology has already flooded the entire market and it has reached the financial segment. Automated trading, also known as algorithmic trading (algo trading) has gathered many fans across the years despite of its controversial state. It consists of a string of algorithms that enable trade executions based on pre-programmed instructions.
Since the market of automatic trading has already left behind the "manual" trading, the key moments for the programs that operate according to a given algorithm are the work speed and the external environment integration. The result determines how fast the orders from algorithmic trading will be executed. In addition, the key factors for the forex robot's speed can be not only the Internet parameters or the server's power.
Whether it is referred to as automated trading, black-box trading or algorithmic trading, the use of computers and mathematical formula always makes trading more systematic because it takes the human emotional element out of trading activities. If this is a good thing or not is a moot point: since it arrived in the markets around 15 years ago, algo trading is a potential source of increased profit, an efficient risk management tool or a
disaster waiting to happen depending on how it is used.
There are well-understood technical risks for users (and for the market if things go that badly). For example, system failure, network connectivity errors, time-lags between trade orders and execution and the chaos that imperfect/poorly tested algorithms can cause. But there are operational disadvantages too. It means paying brokerage fees to banks, but more worryingly – for forex trades, for example – it can expose the trader to market swings during the execution period (whereas with the traditional models the bank takes the risk).
If you know that forex trading is not easy and building a reliable strategy requires remarkable efforts, then imagine making a program out of that. If you have not already understand programming, then it will probably take months or years for you to establish a reliable program. Of course, there are free and paid autotrading system out there and you probably can make use of any one of them. However, how would you differ between the scams and the real ones? Yeah, right, you should already have understanding about forex trading and programming to some degree.