Introduction into High Frequency Trading in Forex

High Frequency Trading "HFT" is one of the most exciting topics in financial trading. It's the style of trading where only speed matters. If you are fast enough you can make good money straightaway. But most of the time you have to be faster than one second. Otherwise you are too slow. This means you have to use software that can do it for you.

In the forex world there are two main types of brokers. Market Makers and "ECN" Brokers. Market Makers are dealing by themselves. If you are trading with a market maker and you go long in a currency pair, your broker is short in that currency. The second type of broker, ECN means Electronic Communication Network. These brokers try to match your order with other market participants or forward it to other networks and banks. This means ECN Brokers do not get the other side of your trades.

The quotes of ECN Brokers are a good benchmark for the real market situation, because they are matching so many market participants. Market Makers often have different prices in comparison to the real market situation, because they are setting their own prices independently from other market participants. Many Market Makers have their own HFT Strategy implemented.

One popular strategy in forex high frequency trading is to arbitrage the market markers. If the benchmark, a fast ECN Broker for instance, has a much higher price EUR/USD than a slow Market Maker, the trader buys the Euro against the US-Dollar. When the difference between the benchmark and the Market Maker quotes disappears, the trader closes the position. This commonly happens in less than five seconds and many trades are done in less than a second.

Pros and Cons of HFT

The pros are you can make money straightaway in HFT. If the strategy works many pips are possible during one day. Forex Brokers usually offer leverage. That means you can invest more than you have in your account. A leverage of 50 says that you only need 100 in your account currency if you want to invest 5000. Therefore you can make good money with just a few pips a day. In volatile markets, during news for instance, many pips in one single trade are possible, because the market is drifting away.

One of the most important cons of HFT Trading is the lifetime of such strategies. Many strategies stop working, because other market participants become faster or the Market Maker changes the strategy. This can happen very fast and result in losses. Many HFT strategies are fully automated and stop trading if losses occur. This is the reason why you have to monitor your HFT strategies.

Furthermore if you are trading with Market Makers you have to consider the policies of the broker. Some brokers do not allow HFT Trading at all and many broker homepages state that "Scalping" is not allowed.

Another point is if you are on the wrong side during high volatility and a gap occurs, it's possible that you will lose more than your initial capital due to high leverage. It's possible to work without leverage but then you will not get as much out of your pips.

Overall HFT is a very straightforward strategy but has many risks so technical skills are required.