The forex market is an increasingly diverse investment space, especially in terms of the type of traders who target currencies and the strategies used to achieve a viable profit.
Of course, this has helped to see the market deliver daily trading volumes in excess of $6.6 trillion, while also introducing concepts such as “high” and “low” frequency trading.
But what exactly do these terms mean, and which option is right for you as an investor? Let’s find out!
Defining High and Low-Frequency Trading
The term “high-frequency trading” (HFT) refers to a largely automated investment vehicle that utilizes powerful computers to transact a large number of orders at incredibly high speeds.
Typically embraced by large investment banks, hedge funds and institutional investors, HFT is popular amongst scalpers and day-traders as it enables users to capitalize on real-time volatility and price fluctuation in the forex (and similar) markets.
By executing millions of orders simultaneously, HFT enthusiasts can optimize their short-term gains in the market, affording large institutions an advantage over retail investors in the open marketplace.
Of course, this is a highly controversial process that has also been criticized by economists, who suggest that HFT can unfairly manipulate the forex market and create levels of volatility that may cause more risk-averse investors to seek flight.
Conversely, low-frequency trading refers to instances where very few orders are executed over the course of a monthly cycle.
Typically adopted by investors with a long-term outlook (such as swing or position traders), low-frequency trading is considered to be a lower-risk strategy and one that often requires investors to keep positions open for a period of weeks or months.
Such trades are also likely to be conceived and constructed on the basis of long-term charts (such as daily charts), with a view to achieving a superior return on investment over time.
Targeting Currency Pairs and Timing Your High or Low-Frequency Trades
HFT initially emerged onto the equity or stock market, although this practice has been largely curtailed by regulatory measures in recent years.
In the forex market, however, HFT systems fundamentally enhance the liquidity of individual currency pairs and the marketplace as a whole, with investors most likely to target innately liquid and relatively stable pairs as a way of striking the balance between risk and reward.
For example, the dominant EUR/USD pairing is the single most liquid asset available when you download your MT4, which means that it’s incredibly easy to buy and sell in real-time.
Similarly, it’s incredibly well-known and relatively reliable in terms of its historical trading range, so investors can target small but recurring price movements to achieve an optimal profit.
Of course, traders can target less liquid, and highly volatile exotic pairs (such as those that include the South African rand) to increase their potential returns, but this also increases your risk and exposure in the marketplace.
In terms of timings, we’d recommend that HFT strategies are best employed during periods of peak volatility, such as when individual trading sessions overlap with one another.
After all, this will help to optimize the prevailing levels of volume, liquidity and volatility, which underpin price movements and create profit through short-term transactions.