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Deciding on the Right Type of Algorithmic Trading Strategy

Deciding on the Right Type of Algorithmic Trading Strategy.

Deciding on the Right Type of Algorithmic Trading Strategy If you are interested in using an algorithmic system to help you trade the forex markets, it is important that you use the right trading strategy. Here are short descriptions of the different types of strategies.

Trend-following: - This strategy analyzes the markets to determine if the price is moving upward or downward and makes its trading decisions accordingly. While the analysis generally uses current price data, historical data can also be analyzed to determine long-term trends. Deciding on the Right Type of Algorithmic Trading Strategy.

News-based: - This strategy is based on fundamental analysis and allows you to “trade the news”. Thus, the system is tied to your chosen news releases and makes trading decisions by comparing the data release with the market consensus.

Market sentiment: - This strategy is based on measuring the sentiment of participants in the currency market so they can identify whether the conditions are bullish or bearish to identify entry points for trades. There are also some systems that can scan various social media sites in order to gather more information and provide a more accurate measure of market sentiment. Deciding on the Right Type of Algorithmic Trading Strategy.

Mean reversion. This strategy is based on the idea that markets are trading within a range. The system works by computing the average price of the currency using historical data. This price is then used as the mean and trades are made based on the assumption that prices would eventually revert to the mean.

High-frequency trades.This is a controversial strategy which involves making trades that take advantage of small fluctuations in price to capture profits. These trades typically last for just a microsecond and use scalping or arbitrage strategies. Since the price changes involved are very small, the volumes traded have to be high in order to generate a good profit.

Iceberging: - This is a strategy that is usually utilized by big institutions and involves breaking up their trades into smaller sizes and executing them separately. These smaller trades can even be executed at different times. This is done in order to conceal the fact that a very big position is being opened in order to avoid alerting other traders. The name of the strategy comes from the fact that, because of the way it is executed, the bulk of the trade is concealed like an iceberg underwater and only small parts of it can be seen by other traders.

When choosing a strategy it is important that you choose one that genuinely reflects the way you typically trade as well as your trading personality, in order to ensure it meets your particular requirements and is effective for you as a trader.
This article has been posted with the permission of its author Mr. Zahir.

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