How Algorithm Trading Evolved Into the Mainstream - Investing Shortcuts

How Algorithm Trading Evolved Into the Mainstream

By February 9, 2018Forex
Algorithm Trading

In recent years, we have witnessed a growth in algorithmic trading in the retail Forex sector. There are many questions about what it can bring to the markets in the next few years and how long this trend will continue. There are a

When trying to understand these trends, it’s important to analyze some of the causes that caused this trend to develop. Here are four major reasons why algorithmic trading has become more popular.


Forex is an Easily Accessible Market with No Central Regulation

As is commonly known, Forex is not a centrally regulated market and offers a simple and straightforward way into trading. You can start trading just a few hours after opening an account. Usually, you just need to provide some basic documents and make a monetary deposit.

Another advantage is the possibility of starting out with significantly lower amounts compared to other types of investment. In general, it’s much easier to start Forex trading than buying shares or futures. This ease of use has brought many people to Forex.

All this to say that Forex is an accessible market for developing retail programs for algorithmic strategies. This is much easier compared to commodity or shares markets, where different regulations, limits, rules and accessibility issues have lead to the minimal use of algorithm programs in the retail sector.


There’s High Quality Historical Data

Back testing the algorithm strategies with historical data is one of the main pillars of today´s algorithmic trading. In general, every developed strategy must undergo different tests using different types of historical data to simulate as many trading conditions as possible.

Compared to other markets like stocks or commodities, Forex brokers often offer historical data for free. Therefore, everyone can receive proven historical data without paying a significant amount or having an account of a certain size, as is the case of commodities. This is one of the most crucial conditions when it comes to the development of algorithmic strategies.


Bad results of discretionary and single EA trading

Over the last few years, Forex has become hugely popular. However, many traders have realized that it is not easy to become profitable in the long run. Often, traders realize that they don’t have time to trade or follow charts in the volatile periods or the trader´s psyche can’t stick consistently to a trading system. In the worst cases, a trading system working together with risk and money management is totally absent.

Another question is obviously about having a “feeling” for Forex markets. I have met thousands of traders in my life, either when working for brokerages or during my educational programs, but only a few traders had a real “killer instinct” for Forex markets. The reality is that the majority of successful Forex traders use some kind of automated strategy. Many traders have purchased so called trading robots or EA (expert advisors), which are simple programs that are often built just to give the impression of successful Forex trading. The problem is that a system based on a single trading strategy, often without any backtesting, can’t work.


Availability of Software From Emerging Companies

Forex offers retail traders conditions that other markets can’t compete with, but at the same time it’s not easy to trade discretionarily. Some traders have therefore started to develop their own ways to apply modern algorithm strategies on Forex markets, where it’s easy to obtain the necessary historical data.

Forex algorithm companies often started as side projects for mathematicians or computer programmers. The market is expanding]. These days, you don’t need to have any programming skills to build your own portfolio of profitable strategies. In the same way that you build a diversified portfolio of shares or other financial products, you can develop a portfolio of diversified automated strategies using algorithmic trading. Trading that is well tested for challenging market conditions.

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Zdenek Zanka

Author Zdenek Zanka

Zdenek has been working in the financial markets since 2006. He started with futures and Forex, and worked for various banks and leading brokerage companies. Since 2013, he has focused mainly on algorithmic trading. Now, besides his own trading activity, he provides education in algorithmic trading worldwide. Courses based on his methods are currently available in 5 languages and have more than 20,000 students from 95 countries. He is the CEO of the financial educational portal

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