High Frequency Trading
Very often, a complex name hides a simple truth.
Many people, having heard about high-frequency trading, begin to complicate things and invent all sorts of theories.
In fact, high-frequency trading is nothing more than pips , and the speed of opening and closing is so high that you, as an ordinary person, may not notice how the order was closed or opened, since in high-frequency trading the speed of opening and closing a transaction is calculated in milliseconds.
All this became possible thanks to the development of robotic trading and software, since only a machine, but not a person, can make decisions and open transactions at such a speed. However, opening and closing speed is not the whole point of high frequency trading.
By deciphering such Forex terms, you can understand the very essence of their practical application as a strategy.
What is a high-frequency trader's income based on?
A feature of high-frequency trading is the very high speed of order processing, and the speed of opening and closing orders is not so important, but receiving quotes and access to information before anyone else.
Thus, high-frequency trading is based on the fact that companies involved in it see market changes much earlier than an ordinary trader due to the absence of intermediaries and all kinds of technological barriers. Each fund that engages in high-frequency trading is located close to the exchange floor and has direct access to the market.
Therefore, this type of activity is only possible when trading stocks, futures and other underlying assets. In the Forex market, high-frequency trading is practically not used due to its weak advantage over other players.
If we talk about earnings, then with high-frequency trading the algorithm opens dozens of trades per second, and the profit on one trade can be a tenth, or even a hundredth of one point. Therefore, in order to earn real money in this way, a position is opened with a large lot, which entails high risks.
High Frequency Trading Strategies
Strategies for making money with high-frequency trading are extremely simple to understand, but difficult to implement. So, let's go in order:
1) Classic arbitrage. The strategy is that the trader finds some patterns in the correlation of the same asset on different exchange platforms. Seeing a fraction of a second earlier how the price will behave on another site, the algorithm opens trades, thus capturing a share of the profit.
In the Forex market, this method is also applicable due to the different speeds of obtaining quotes from brokers. However, you must understand that brokers prohibit arbitrage in the Forex , so using prohibited methods of earning money can deprive you of your profit and deposit.
2)Providing liquidity to brokerage companies and traders. Due to the fact that the high-frequency company is located near the exchanges and has direct access to them, it becomes possible to act as a liquidity provider for brokerage companies and charge a fee in the form of a spread. Therefore, when working with a brokerage company, you must understand that they receive quotes from companies engaged in high-frequency trading.
3) Taking advantage of the speed of obtaining information relative to other players in the market.
4) Detection of hidden orders from large players. The bottom line is that the algorithm sends orders for purchase or sale in a small volume and measures their execution time. The faster the execution speed, the more likely it is that on the other side there is a large player with a large volume that can affect the change in quotes .
Disadvantages of High Frequency Trading
As I already said, the position is opened with a very large lot, so the risks when trading are very high. And if we add that the number of orders per second can be measured in dozens, then with the slightest failure of the algorithm, the company’s losses per hour can be simply catastrophic.