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Automated and Algorithmic Trading Tutorial

Automated and Algorithmic Trading Guide

The Foreign Exchange is a fully-decentralized market where international currencies are traded over-the-counter. As there is no specific center that controls the raw of currency transactions, there is no single exchange rate for every pair. Nonetheless, due to currency arbitrage, exchange rates tend to trade very close to one another. Moreover, the Foreign Exchange market is extremely liquid with daily volumes exceeding 4 trillion US dollars. This combination of a decentralized market structure and enormous liquidity creates the perfect environment for the development of automated trading systems.


Automated and Systematic Trading

Automated trading refers to the process of trading the global financial markets without any human intervention. Automated trading is a branch of systematic trading and consequently, all automated trading systems are systematic systems.  Systematic trading assumes:

  1. A rules-driven trading strategy that is based on objectively computable inputs
  2. The implementation of the strategy by eliminating the human emotional factor

General Categories of Automated Trading

According to Mitra, di Bartolomeo, and Banerjee (2011), automated trading can be classified into five main categories:

(i) Algorithmic Executions (The category that interests us the most)

(ii) Statistical Arbitrage (Exploiting trade opportunities deriving from market inefficiencies)

(iii) Predatory Trading (The practice of entering thousands of orders while expecting to execute only a tiny fraction of them)

(iv) Crossing Transactions (transacting with another entity without exposing the orders to other market participants)

(v) Electronic Liquidity Provision


How Automated Trading Differs from Algorithmic Trading?

Automated trading is almost considered synonymous with algorithmic trading, however, there is a difference in how these two methods approach the market. Automated trading refers to the automation of everyday manual trading processes. Automated trading usually focuses on the prediction of asset price movement based on a recognizable price trend, macroeconomic indications, news releases, and many other events.

On the other hand, algorithmic trading refers to the research and analysis of market conditions and trading data in order to develop efficient instructions and rules. It includes a wide variety of parameters such as price, time, and volume.

The two different approaches, at a glance:

  • Automated trading focuses on the automation of the trading processes and especially as concerns execution
  • Algorithmic trading focuses on the automation of trading research and analysis by incorporating an execution module


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