Regulation of financial markets is increasing as they become more complex and computer-driven. This is to the advantage of small investors who require legislation to protect them from unscrupulous operators and so-called insiders. A more regulated environment means a better trading experience for automated forex traders.
Results presented at a conference earlier this year showed beyond doubt that a computerized, or robot, trading program’s strategy developed at the University of Southampton in 2008, can beat human traders using any other strategy.
According to co-developer, Professor Nick Jennings of Southampton University, “Robot traders can analyze far larger datasets than human traders. They crunch the data faster and more efficiently and act on it faster. Robot trading is becoming more and more prominent in financial markets and currently dominates the foreign exchange market with 70 percent of trades going through robot traders.” About 50% of retail forex traders already use automated trading systems.
This achievement marked an important step in the evolution of financial markets, one which all traders need to be cognizant of.
Financial markets move much faster than ever before, thanks to the ever-evolving financial exchanges and technology-driven platforms. In the last few years, we have gone from face-to-face trading to computers trading with computers. This has caused markets to move much faster than humans ever imagined. Traders now compete with other traders to achieve a millisecond advantage.
The fact is that markets are becoming more automated and in order to compete in this new rapidly changing environment, forex day traders need to embrace automation.
According to Albert J. Menkveld (author of The Future of Computer Trading in Financial Markets), trading costs have shown a general decline in the period of migration to electronic trading, yet trading has become more erratic. The bid-ask spread decreased, and depth increased, while commissions and fees have fallen. This is arguably driven by forces of market competition but potentially also by the ability of computers to reduce adverse selection risk. This fall in the costs associated with electronic trading is encouraging more private forex traders to enter the market. The reduction in cost also means that traders can now implement more active, automated strategies competitively.
Thanks to electronic trading, brokers now boast client bases that span the globe. Retail traders no longer have to sit in London, New York, or Chicago to have an edge. Improvements in technology and telecommunications in developing economies are encouraging new entrants into the world of electronic trading. This will increase trading volumes as well as competition among traders. However, with forex markets now trading twenty-four hours a day, five and a half days a week, manual traders are finding it hard to compete. Manual traders may often miss big profit opportunities simply because they are not at their desks when it happens, giving auto traders a competitive advantage.
Another interesting development that is likely to gain popularity is the increased use of leveraged investments by retail and individual traders. Once the domain of large banks and institutional investors only, small individual traders now have access and are making use of leveraged instruments in their investment and trading portfolios. Trading leveraged instruments has the advantage of giving a smaller investor more exposure in the market; however, it also requires a more stringent and disciplined approach to trading. Many traders have migrated to automated trading systems as a means to take advantage of leverage while ensuring that poor trading does not impact their accounts.
Regulation of financial markets is increasing as they become more complex and computer-driven. This is to the advantage of small investors who require legislation to protect them from unscrupulous operators and so-called insiders. A more regulated environment means a better trading experience for automated forex traders.
Whilst nobody has really proved that they can consistently predict where markets are going, some are able to consistently extract returns from it. Consistency is a key feature of market performance and something which automated trading strategies are good at. In fact, as markets continue to evolve and efficiencies improve, manual traders will find it harder to compete.
Automatic trading strategies are the way of the future and will continue to increase their competitive advantage over manual trading strategies as technology evolves.
ABOUT THE AUTHOR: James Wilton
