Foreign Exchange market is renowned around the world for trading currencies and being the biggest yet the most volatile financial market in the world. In a form of trading where a trader can suffer great blows if the money is not properly managed, traders look for solutions that ensure security for their investment. An algorithmic forex trading platform is an answer to all such problems traders face in financial markets. An Algorithmic trading platform is a piece of software which accurately and correctly makes the execution of a trading order possible leaving less room for mistakes to take place.
How Algorithmic Trading Works
An algorithmic trading software follows an automated system that follows one after another step of instructions to complete a particular action. Each program that runs on the computer is based on some sets of algorithms. A similar development took place in the recent past when a set of algorithms were incorporated into forex trading.
Algorithmic trading is a process which uses computer programs for the execution of a particular order. It works on robotics, therefore, possesses the quality to place order exactly at the moment when a market reaches the stop limit. The whole process of the placement of order happens at such speed that is not possible for a human being to catch up with. The results generated by this software are more accurate and fast. The field of automated trading has gained much popularity in the last few years.
The Community of algorithmic trading software.
Algorithmic trading software are primarily used by big trading firms, investment banks, proprietary trading firms and hedge funds. These software are usually large in size and contain a large amount of data, therefore trading firms keep a setup exclusively built to meet their requirements and hire a special team to manage it.
It’s not just the companies but individuals also that rely on algorithmic software for trading. Traders prefer to purchase a trading platform than opting for a custom built application, as a common algorithmic trading software can also suffice for their needs. The selection of appropriate trading software for the needs of the customer is done by a broker or a firm involved in the deal.
Algorithmic Trading. What’s the best option? Develop or Purchase?
As mentioned earlier, a trading software can be assessed in 2 primary ways, it can either be built or purchased.
Daily traders and individuals often choose ready-made software for trading. This option is cheaper and also caters to the needs of day traders, whereas companies and trading firms build their own platform according to their requirements. The reason of big firm’s switching to the option of personal software is their low tolerance for flaws in the system, however, the option can come at a high cost and still not be fully error free. The rate at which customized trading software are developed can also minimize the level of profit returns a company expects from the business.
Algorithmic trading software work on artificial intelligence involving robotics, which always carries the threat of a crash with it. This can lead to great losses for the company. So, it’s important companies make themselves aware of its feature to make the best use of the system. An algorithmic trading platform can be a savior for companies striving to make a place in the market.
Features of an Algorithmic Trading Software that Enable Better Trading.
- Availability of Market and Company Data:
Forex trading is all about keeping and reacting to real-time financial market data and price quotes. It’s the basic characteristic of many algorithmic trading software that they keep track of the real-time market data feeds along with the company’s data feed. The data feed can be included in them as a built-in feature as well as should include the provisions to integrate alternate sources with the system.
- Market Connectivity:
Different trading markets provide information in different languages, traders that work for these markets should remain equipped to decrypt data provided in various formats like TCP/IP, Multicast or a FIX. A software should be efficient enough to translate that data into different formats. The option of going with third party data vendors like Bloomberg and Reuters is also open with them. These vendors take data from different exchanges and provide it in a comprehensible form to clients. An algorithmic trading software should be able to manage and process these feeds as needed.
Latency can also be called the time lapse in the activity of data points from one application to the other. The whole series of events take place in different slots of time where one event follows the other, for instance, if a price quote comes in at 0.2 seconds from the exchange to your software vendor, in 0.3 seconds the price quote leaves the vendor’s data center to reach trading screen and it takes only 0.1 seconds for a trading software to process the whole information. In 0.3 seconds, the information is analyzed and a trade deal is placed, and it takes just 0.2 seconds for your deal to reach the broker, then only 0.3 seconds for a broker to route the trade order to the exchange. An automated trading software keeps track of the movement of data points and makes the delivery and placement of order right in time to generate more accurate results.
- Configurability and Customization:
Many algorithmic trading software are built on standard built in trade algorithms, such as something based on a crossover of 50 day Moving Average (MA) with 200-day MA. A trader likes to experiment by using 20 day MA over 100 day MA. Regardless of whether it’s used for buying or building purpose, the trading software that is used should have high configuring ability and customization.
- The Feature to Write Customized Programs:
Languages like Python, C++, JAVA and Perl are most commonly used for programming to develop a trading software. Many trading software that are developed by third party vendors also presents to a buyer the option of writing your own custom program. This option lets a trader enjoy and experiment with the software that he is getting developed for himself.
- Back testing Feature on Historical Data:
Back-testing drive involves testing a trading strategy on the past data. It tests a strategy’s scope and profit generating chances based on the past data, assessing its ability to succeed or fail. As the feature is built to test strategies, there is room for changes in the software if a flaw in functions is found. The historical data’s feature is indispensable in the system as all the back-testing is performed on it.
- Integrated System:
A trader can use different terminals for price analysis, also a broker’s terminal to place trade orders and other programs to analyze trends. A trading software should have easy plug n play integration and APIs, which can vary from user to user. These systems ensure scalability and integration.
- Integration with Trading Network:
Integration with trading network enables connectivity of trader with the broker. A trading deal requires timely execution of the order as the limit range is reached, the placement of order requires a good connection between the trader, broker, and the exchange.
- Platform Independent Programming:
Some programming languages need exclusive platforms, like certain versions of C++ run only on certain operating systems, whereas Perl can work on almost all operating systems. Whenever purchasing or developing a software, priority should be given to a platform-independent trading software or a software that supports platform-independent languages. This feature leaves a positive effect on your trade and improves returns for you.
- Human Intelligence and Algorithmic Trading:
Our dependence on computers has crossed all boundaries. It is very easy for a trader to sit back and do trade through computers, however, if he plans to generate good results from trading he has to incorporate his own intelligence into the game and not rely on a software completely. A trader also needs to do all his assessment and verification of the underlying algorithmic programming and test the software before finally purchasing it. He should make sure that the software caters to his needs and also check if it contains the ability to well execute all trade deals in the given time.
Foreign Exchange being a lucrative business invites different category of people’s attention to trade it. There are many newbies investing in currency business and aiming at generating good results from it. An algorithmic trading software provides a solution for these traders and gives them an opportunity to trade with minimum chances for a loss to take place.
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