High-frequency trading or high-frequency forex is a trading technique that uses algorithms to execute many trades in a short period. The algorithms, commonly called bots, follow specific rules stipulated in the code and execute a trade once all the rules are met. The algorithm can be set to trade several different currencies simultaneously, which a human being cannot do. This trading technique is done with small timeframes and would be suitable for scalping. There are advantages and risks to using algorithms in trading forex.

Advantages of High-frequency Trading

  • ­­It removes human emotion. The algorithm follows a specific set of rules to execute trades. Therefore, there is no emotion-based trading. You can eliminate motions such as fear and euphoria
  • Wide scope. It’s possible to program the algorithm to analyze several currencies concurrently for trade opportunities. It can lead to a trader finding profitable trades they would not have been able to find on their own.
  • One spends less time analyzing charts. Algorithms can analyze charts on their own, which means you, as a trader, would spend less time analyzing charts and executing trades as the algorithm will handle that.
  • High-frequency trading also allows traders to benefit from small price fluctuations due to the large number of trades that the algorithm can execute in a short period.

Risks of High-frequency Trading

  • Wide scope. We previously mentioned this as an advantage, but it can also be a risk of high-frequency trading. Spreading the algorithm over several currencies can also increase your losses during high volatility markets.
  • Market sentiment. An algorithm cannot study the market sentiment and thus can continue executing trades that would eventually become losses.