How Forex Trading Algorithms Work

Algorithmic trading is simply automated trading. This involves the use of electronic platforms such as the popular MT4 that most traders use. This system of trading takes into account factors as timing and prices to make trading decisions to place a buy or sell order. Most EAs are programmed algorithmically to use several strategies to execute trades.

Among these strategies are arbitrage, trend following and scalping. Since we mentioned “automated”, it is worth knowing that anybody at all can write these trading algorithms if they know the MQL4 language. But as to whether these expert advisors will be winners or losers, is solely up to the trader and how experienced they are.

Arbitrage trading involves taking advantage of the disparity in the pricing between two assets. For example, at the time of this writing the pricing between the EUR/USD pair at Tallinex and Exness is 1.21585  and 1.21575 respectively. It’s clear there’s a difference of 10 pips of which we can take advantage! Assuming the feeds from Tallinex is faster, we’d want to place a buy order at Exness and bingo, we’re 10 pips richer.

Trending following is speculating that the market, if going up, will continue to climb uphill or if falling will continue to fall for an extended period of time or even in a medium-term and hence buying or selling. Most forex traders play by this strategy and I for one do this a lot. Traders who  use this strategy usually use moving averages and channel breakouts to determine the general direction of the market. They close the order when the trend seems to have ended without being sure whether the trend has actually ended, in most cases.

Another common trading algorithm is Scalping. Now I know most brokers prohibit this strategy but some do allow it. Brokers who don’t allow this kind of trading style will usually try to stop traders buy pushing a lot of re-quotes to discourage traders. Exness and Tallinex allow scalping and all EAs that trade using this system. Scalping involves establishing a position and liquidating it as quickly as possible in a minute or seconds time frame. It’s actually a form of arbitrage trading for market makers usually.

There are still lots of trading algorithms that I wouldn’t have enough time to mention but the ones mentioned above are commonly used by traders.

One thing to know before using these strategies, as I will advise, is to use and test them for an extended period of time on demo accounts manually, and then when you have mastered one particular or two strategies, you can outsource a programmer to get this into MQL4 code for an EA to trade so you don’t have to stare at screens all the time. However, this is a matter of personal preference. You can open free demo accounts with Exness and start practicing. Once you get comfortable you can actually trade on a real account and make some profits.

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