High Frequency Trading (HFT), what is it? Who Is Involved? How Does high frequency trading work? How does High Frequency Trading Impact the retail forex trader like you? Should you be concerned about HFT?
Lets find out…
By the way, you may also be interested in reading the following:
- price action trading secrets
- forex scalping systems
- amazing list of forex trading strategies that work
High Frequency Trading seems to gain a lot of attention lately with such news like the following:
High-Frequency Trader Charged With Market Manipulation & this High Frequency Trading Firm Latour To Pay $16 Million SEC Penalty
and someone even called it high-frequency trading as legalized scalping but what is high frequency trading and does it affect you the individual forex trader?
For a while, it seems that high frequency trading was largely done in stocks (or shares), commodities and futures markets etc but is high frequency trading also being done in the forex market?
DEFINITION OF HIGH FREQUENCY TRADING (HFT)
This is a very good definition of high frequency trading :
high frequency trading is when financial firms use complex computer programs to make money on the markets just for very small and tiny price moves. These computer programs exploit small minute movements in the markets for example buying a share at $1.00 and then sell less that a second later for 1.0001.
These trades are usually opened and closed in less than 1 second or fractions of a second. As a human being, you can’t do that as you are too slow.
SO HOW DO HIGH FREQUENCY TRADING FIRMS MAKE THEIR MONEY THEN?
In the example above, the profit for one trade is only $0.0001. That’s a really appalling profit figure for a retail trader but not so for the high frequency trader.
You see, for high frequency trading firms, they have the technology and and financial capacity to trade and make very small, small, small profits from very small price moves and the secrets is in the number of trades they place and they trade in thousands of trades in less than one second or fractions of a second and that’s how they make their money. Let me give you and example of how its done:
- in one second, if the high frequency trading firm buys and sell 100,000 times and makes a profit of $0.0001 each trade then the profit for that second would be $0.0001 x 100,000 trade =$10. So the HFT firm makes $10 per second
- now there’s 60 seconds in a minute, so in 1 minute, the high frequency trading firm would have made $600.
- in one hour, it wold have made $36,000.
- in 8 hrs, it would have made $288,000
- in one month assuming 20 days and trading at 8hrs trading each day, the HFT firm would have made $5,760,00.
High frequency traders are not involved in buying and holding traders like you and me waiting for price to hit the profit target about 30 pips aways which many take 15 minutes or 3 hrs!
They trade in seconds (or less than fraction of a second) with thousands of trades and make very tiny profits but once multiplied over thousands of trader per second, these tiny profits add up during the day.
HOW HAS HIGH FREQUENCY TRADING HAS CHANGED THE INVESTMENT LANDSCAPE?
Thanks to technology and advance of computers, high frequency trading definitely has impacted the financial landscape.
How?
Well, years ago, when traders bought whatever financial instruments, they hold onto it for years. Today, its is being said the average holding time has been greatly reduced as explained by this article below:
The high frequency trader is not concerned about the fundamentals of a currency pair and what causes it to move etc…or in the share trading, the high frequency trader is not concerned about the value of a company in the long run so he could buy and hold and expect to make a profit after a period of time.
FOREX MARKET-THE PLACE TO BE FOR HIGH FREQUENCY TRADERS
High frequency trading was initially more focused on the share market but this is currently changing due to a lot more scrutiny.This article explains how the switch is happening to the forex market with high frequency trading:
If you have been trading forex for a while, you will know high frequency trading is definitely happening in currency trading.
I have seen how the currency markets move especially during news times.
Even like a few seconds before a forex economic news gets released, the forex market is already moving and I used to wonder how and why it was behaving that way!
It simply means, I as an individual trader have live data feeds that I am relying on are very slow in comparison compared to those high frequency trading firms who’s computers get this data and execute trades in split seconds even before I even have a change to place an order.
CAN YOU BE A HIGH FREQUENCY TRADER?
If you are a forex scalper and make 30-50 traders a day, would you consider yourself as a high frequency trader?
Tell you what? You don’t even come close! Hah Hah!
In answer to the question above:
Yes: if you have the financial capacity and there’s a lot of work required to setup a high frequency trading firm.
No: if you don’t have the financial capacity.
SHOULD YOU BE WORRIED ABOUT HIGH FREQUENCY TRADING IMPACTING YOU IN THE FOREX MARKET?
Personally, I really don’t give a rat’s arse if someone or some firms are doing high frequency trading…who cares?
Why? Because my trading style is swing trading and when I enter a trade, I really don’t care what happens in second or fractions of seconds where high frequency traders get their “highs” from. I have my trading plan to stick to and my stop loss is placed at a level where there’s less chance of getting stopped our prematurely and I control and manage my trading risk and I will do just fine.
And another reason is that the forex market is what? A 4 trillion dollars a day market? Man, that’s a huge market…which simply means even a massive trade by one single high frequency trading firm or individual will hardly move and influence the forex market.
If your trading style is swing trading or trend trading, you shouldn’t be bothered about high frequency trading at all.
But if you are trading forex economic news, you can bet your balls that you are trading with faster computers.
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