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High-Frequency Trading Explained

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Since decades now, trading changed. It used to be that humans decided the market direction, but this is not true anymore.

Nowadays, robots are the ones that dictate price action and humans follow. This is because high-frequency trading is a whole industry now and makes the most trading volume on any given day.

What is High-Frequency Trading?

Like the name suggests, high-frequency trading implies trades being taken very fast. Literally, thousands of trades are taken in a second. Or less than a second.

How is this even possible? The answer is that there are trading machines, or computers, so powerful and accurate that will trade like this.

They are being programmed to follow an algorithm, and, based on their inputs, these machines are instructed to buy or sell a specific currency pair at a specific level. High-frequency trading is totally different than the trading a retail trader does.

Nevertheless, the market is the same, so one needs to adapt. Retail traders need to adapt to high-frequency trading and how the market reacts.

Trading changed drastically in the last years. New technologies are available and this leads to new trading account types.

Years ago, for example, the spread on the most popular currency pair, the EURUSD, was three pips. Now it costs less than 0.5 pips to trade the same pair on most of the brokers.

Also, the quotes were having a four-digit number after most of the currency pairs, now there are five-digit numbers. Trading algorithms or robots are trading for the ninth or even the tenth digit!

News Trading Algorithms

Most of the trading algorithms or robots are programmed to buy or sell based on the economic news release. The economic calendar tells the news that is to be released ahead of a trading week.

The data is known in advance and a forecast or an expectation is known as well. The algorithms are instructed to buy or sell if the actual data differs from the expected one.

For example, let’s assume the Unemployment Rate in the United States is about to be released and the expected number is supposed to be 5%. The algos are instructed to buy the U.S. dollar against all other currencies pairs if the actual number is less than 5%, and sell the dollar against other currencies if the actual number is bigger than 5%.

News trading algorithms

The bigger the difference, the stronger and more powerful the move to come. Therefore, the first reaction to an important news event is happening in a blink of an eye: not because humans are all buying or selling at the same time, but because computers are buying and selling at that very second, all of them in the same moment.

Text-Driven Algorithms

Robots can read too! This may sound like a funny thing, but it is the pure truth.

In currency trading, what a central bank is doing with the interest rate is key for the way a currency is moving. As a rule of thumb, if the interest rate is hiked, or moves to the upside, the currency will appreciate, and if it is cut, or moves to the downside, the currency will start losing value.

Traders are always trying to position themselves for what the central bank’s decision will be. Trading algorithms are programmed to do that, too.

Central banks communicate to market participants in a specific language. This language is used to signal changes in the monetary policy.

For example, the biggest and most important central bank in the world, the Federal Reserve of the United States, is meeting every six weeks to assess the state of the economy and to set the monetary policy and the interest rate for the world’s reserve currency: the U.S. dollar.

Every meeting is followed by a statement, the FOMC (Federal Open Market Committee) Statement. This is a text or a document that is released and contains the decisions, if any, taken by the committee and decides the fate of the U.S. dollar for the period ahead.

Trading algorithms compare this text with the previous one from six weeks ago. Any difference or change in the wording will result in the algorithms buying or selling the dollar.

An example of a bullish wording would be that the Fed is planning to hike interest rates three times in a year when compared with only two times in the previous statement. The algorithms will see this in a blink of an eye and will buy the dollar in frenzy.

Moreover, the algorithms are “glued” to newswires as well. The new agencies have newswires that transmit snippets or snapshots of important events from around the world.

The algorithms are instructed to react to these snippets, namely, to buy or sell a currency based on the news the hits the wires. Considering that the world is interconnected these days, virtually traders must look for news from all corners of the world to affect the market.

The trading arena is a complex and complicated one, and sometimes it is not clear why the market is moving. A trend is usually starting before an important news or change in the fundamental value of a currency is happening. Coming back to the start of this article, traders must follow robots to make it in the trading arena. The high-frequency industry is dominated by more and more powerful computers that can store more and more information and data.

This data is used for deciding when and where to buy and sell a currency and this is becoming more and more complex by the day. The high-frequency industry is huge and there are tons of money that are moving daily.

Quant math or quantitative math is a whole industry now dedicated to programming these supercomputers to buy or sell financial products. Expect this trend to continue as technology is expanding more and more.

The world is changing so fast that trading couldn’t be different. Trading is changing too, and the fastest traders understand this the better.



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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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