High frequency trading strategies, are popular with institutions and are attracting the attention of retail traders. This form of trading is transacting an increasing amount of trades in currencies but what how do high frequency trading strategies work and should it be a trading method you should consider?
Let's look at the definition of high frequency trading, how these trading systems work, their potential to make profits and how they can lead you to Forex trading success.
High Frequency Trading Explained
In the book High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System, by Scott Patterson he introduces the world of high frequency trading in the cover notes:
"A news-breaking account of the global stock market's subterranean battles, Dark Pools portrays the rise of the "bots"- artificially intelligent systems that execute trades in milliseconds and use the cover of darkness to out-maneuver the humans who've created them." (Scott Patterson)
The world of high frequency trading systems fascinates traders and they have a vision of complex algorithms which come into the market and execute there trading signals in the blink of an eye, trade big volumes and then bank out the market within seconds on minutes with huge profits – so is this the reality of high frequency trading?
High Frequency Trading – What Profits do these Systems Make?
The truth is actually very different to the myth that has been created around this trading method. Firstly its really day trading or scalping which is done very quickly and trades are held for a very short period of time.
The idea of being able to predict forex prices in short time spans is something which obsesses traders and they think High Frequency trading technology can do it. Traders are in awe of systems which use fuzzy logic, artificial intelligence, neural networks and can execute a trading system in a millisecond and think, these systems are going in and out the market all day, snatching small profits which mount up to a huge problem over time – that's the view of most traders but it's not the truth.
The problem is trading currencies, in very short time spans is doomed to failure due to the shorter the time period traded the more random the price action. Most of these systems are run by big banks, Hedge funds or discretionary fund managers.
They create the myth of automated trading systems, being complex and being able to beat the market but the truth is – they don't. All these algo systems do is make money, for the people trading them in commission, not in profits on the trading account. Lets take some of the biggest users of these algorithmic trading systems – Hedge funds and see how much money they make with them:
"Shocking but true: if all the money that's ever been invested in hedge funds had been in treasury bills, the results would have been twice as good" (Simon Lack the Hedge Fund Mirage)
So these complex, algo trading systems are very clever but they don't produce results. There really just tapping into the public perception of technology beating the market but its a human market which is unpredictable and it will never be beaten. Fact is the same number of traders lose in today's Forex markets as they did 30 or 50 years ago. I would also bet, the same number of traders will lose in the future. So if you use a simple trading system, you will beat these algo trading systems.
If you use a simple trading system and focus on long term trends, rather than the short term market noise, you will make money and beat complex High Frequency Trading Systems so you can beat the majority of the big dogs easily and the facts of their performance proves it – you only need to make 10% per year and you will have beaten these so called professionals.
Impact on Volatility
With the growth of Internet currency trading we have seen a huge rise in algorithmic trading methods and traders, using short term trading strategies and they don't make profits but what they do is create huge volatility. The markets today tend to be more volatile than they were just 30 years ago and this means that currency trends are not as smooth as they once were.
This increase in volatility means that any trader who wants to make money needs to focus on the trends and have their money management parameters set so their stop loss is close enough to protect their equity but also outside of the market noise and this in my view is one of the major challenges of trading currency markets for profit.
Do not be taken in by the myth, High Frequency Trading Systems are just another name for a scalping or day trading system and they don't make money. The public has an obsession with technology and beating the market but they never will. The currency markets are human and the same percentage of traders, will always win and the same number will lose.
If you want to learn how to trade Forex markets forget about these complex automated trading systems which trade short term and focus on using a simple system which is long term trend following by nature and you will enjoy Forex trading success, while High Frequency Traders lose.