High-Frequency Trading or (HFT) basically is a trading method which is based on speed on execution of trading signals. A high frequency trading system can process information in a split second making it quicker than a human can do and this is supposedly an advantage but is it? High frequency Forex trading is the big buzz word and very popular but can it give you a trading edge? Let's look at the logic of this trading method in more detail

High-frequency trading systems look to do a large-scale turnover of positions, with the objective of making small regular profits and the trades are normally always shut within minutes, although some may be allowed to run to the end of the day session.

The systems are based on three different ways of price analysis:

They can used to judge and trade investor sentiment. For example, news story comes out or there is an economic number realize. A trading signal can be placed in the market by the algorithm to get the order in, before the vast majority of traders have a chance to respond and then, the system quickly make a profit.

Different Trading Methodologies

HFT Volatility trading systems work on the basis of taking advantage of a relative price movement rather than absolute price movement. The objective is simply to harness volatility, to make money and the overall direction of the trend is not a major consideration.

HFT Arbitrage trading systems look to take advantages of imbalances within related markets and look to take advantage of moves which lead to re adjustment of these discrepancies.

Statistical arbitrage is popular with major banks and brokers, where there trading systems trade a wide variety of pairs which are correlated and looking for opportunities to trade them as a group to make profits.

Another Name for Day Trading or Scalping But Faster

While High Frequency trading sounds very new and high tech, it really is just another name for day trading or scalping but is seen as faster and traders believe that it can increase the odds of success.

Now everyone knows that day traders and scalpers are trading random volatility and lose. The people who use High Frequency Trading Systems argue - that if you gain a speed advantage, you can you get a trading edge but can you?

Speed of Transaction

These systems can process information on price an execute an order in around 0.3 of a second but how is this an advantage?

Forex markets are not predictable and you have no way of knowing how they will respond in such short time periods and you can use as much complex mathematics as you like – Forex prices don't move to any mathematical equation and these systems cannot gain an edge even with speed of execution. With the cost of doing business, you also have to cover the transaction cost which is high, as you are looking for a small profit and this is a great way to lose money.

The Impact of Cost

Trading big volumes, with high leverage in short term time frames where volatility is random, is never going to make money due to commission impact on profits and loses. This form of trading strategy, simply piles up huge commissions for brokers who trade these systems to generate commission for the house and they will welcome retail traders as they know they will make a lot of money out of them too and if there a market maker, they will also swallow their deposit at the same time.

A Simple Fact You Need to Know

95% of Forex traders lose money today trading in Forex and this same ratio lost 50 or a 100 years ago.

We have had numerous advances in technology from faster computers, to more powerful software programs with but the same ratio lose.

The obvious conclusion is - technology does not help you gain an edge with marketing timing of your trading signal in terms of helping you make bigger profits.

Final Words

We have seen a whole manner of beat the market technology programs in recent years from expert systems, artificial intelligence,neural networks systems based on fuzzy logic and now high frequency trading systems but none of these systems will beat the market.

These trading methods will lose your money, although it sounds high tech and clever and a high frequency trading system is it will lose money – in Forex trading simple systems, based on trading price action will beat them and that's a fact.