What is high frequency trading?
A part of digital currency trading training is various trading methods and trading strategies. One of these trading methods, High frequency trading It is done with the help of computer systems with special software. The speed of transactions in this method is several times that of manual transactions. So, the possibility of earning more profit increases in it.
In the rest of this article, we will introduce this type of transaction along with its application.
What is high frequency trading?
High frequency trading with an abbreviated name HFT It is called a type of transaction that processes several orders in a fraction of a second. These types of transactions are done with the help of very powerful computer programs that have the ability to process the number of orders in a short time. Traders who take advantage of high-frequency trading simultaneously use highly sophisticated algorithms to analyze the market in order to achieve greater profits. For this reason, traders who have a higher speed of action in executing trades will earn more profit.
Another feature of high-frequency trading, in addition to high speed, is a high rate of turnover, in which the order-to-trade ratio is determined. HFT helps increase the liquidity of financial markets and eliminates the small trading deposits offered by the market. Some reputable providers HFT They are Virtu Financial, Tower Research and Citadel LLC.
The popularity of high-frequency trading began when exchanges tried to encourage companies to increase market liquidity. For example, the New York Stock Exchange abbreviated NYSE Has a group to provide liquidity called Supplemental Liquidity Providers (SLP) Is. This group tries to maintain and increase liquidity for the price in the stock market. SLP group in 2008 right after the destruction Lehman Brothers Launched. At this time, investors were very worried about the liquidity of the market.
To incentivize liquidity providers, the New York Stock Exchange discounts their fees. People who make a lot of transactions in a day can benefit a lot from this action.
Application of high frequency trading
Traders who use the method HFT They use for their transactions, they are almost in A 64 millionth of a second They do. This time is enough for a computer to process the order and send it to the destination device. These automated systems scan the markets for trades and get the information they need better and faster than any human. In the following, we discuss three main and profitable applications of high-frequency trading, which are more popular among traders.
Traders who use a manual system to make their trades do not have the opportunity to make large profits from multiple trades. But high-frequency trading allows them to profit from a large number of trades. With the help of automation, traders in this way can make enough trades with the desired volume and profit from the smallest price difference in those trades.
Short Term Opportunities
As we mentioned, in high-frequency trading, traders can profit from the smallest price differences. It means that it is possible to take advantage of short-term opportunities in the stock market and investors can invest in it. Also, in this type of transactions, it is possible to use that short-term opportunity and make a momentary profit from it.
Let us explain this application of short-term trading with a simple example. In one transaction, there are approximately 1 million shares of a company’s stock. In this case, the price of each of this company’s shares will decrease for a short period of time. This time is a few minutes or even a few seconds for the market to adapt to the new stock. For this reason, manual traders do not have the possibility to take advantage of it and cannot take advantage of this opportunity; But with high frequency trading, it is easy to buy shares in moments of price decline.
Arbitrage refers to the time when you make a profit from an asset with two different prices. A simple example of arbitrage is selling a bottle of soda in different cities. For example, a bottle of soda in city A sells for $1, but in city B it sells for $1.10. This is exactly the same Arbitrage opportunity Is. To make a profit, you can buy some sodas from city A for $1 and sell them in city B for $1.10. In this case, you will get a significant profit.
In general, arbitrage opportunities are hard to find in markets. Because global information networks are updated quickly and prices become similar to each other. But high frequency trading is designed so that traders can take advantage of arbitrage opportunities in a fraction of a second.
For example, the matching time of the New York market price with the London market price is 0.5 seconds. That is, it takes 0.5 seconds for the New York market to reach the price of the London market. This time is definitely too short for a manual trader and he cannot practically use it; But a trader who uses HFT has the possibility to make a profit from it.
Trading strategies for high frequency trading
In fact, trading strategy refers to the rules and principles that traders use at certain times of the market to avoid losses. In high frequency trading, some of these trading strategies are used, which we will continue to introduce and examine their application.
The first trading strategy that uses high frequency trading is scalping. Scalping is a short-term trading method that allows the trader to make small profits throughout the day. Since in scalping, the trader makes between 10 and 100 trades during the day, it may not be possible to do it manually. So, it is better to use the HFT method. In this strategy, the trader must be fully proficient in market analysis and know risk and capital management.
Day trading strategy is another short term trading strategy. In this method, the trader keeps the trading position open for one or more days in order to achieve his short-term goals, which is to make a profit. This method helps traders to profit from even the smallest changes in the market. Due to the sensitivity in Daily dealsThe trader must carefully follow the market news to be aware of the smallest changes. Mastering technical and fundamental analysis is essential in daily trading.
Swing trading is another trading strategy that uses high frequency trading; Why so Swing trading It is a trading strategy that is used in both short-term and long-term trading. In this type of trading, you can use the short or medium time frame to profit from the market price. Traders who use swing trading must master technical and even fundamental analysis. If you use this strategy with the help of high frequency, it will take you a very short time and in the same short period of time, you will get a good profit.
Copy trading trading strategy is a type of investment in which the trades of other traders are copied. This strategy was used for the first time in 2005. In this way, you should find a trader who makes profitable trades Copy trading platform find. Most platforms offer filters to find such people, which make it easier for you to find them.
Exactly when the desired trader opens a new trade for himself, the same trade is exactly copied in your account and you can specify the amount of your capital for this trade. In this case, you will make exactly the same trade as a successful trader and make a profit. In order not to miss the opportunities of the market, you can also take advantage of high frequency trading in it to get more profit in a short time.
Algorithmic transactions, as the name suggests, are transactions based on a specific pattern. These patterns are recorded and specified in computer systems and all transactions are done based on those patterns and rules. To complete and speed up transactions with this strategy, you can: Frequency trading Above also benefited.
The latest trading strategy that combines high frequency trading. Arbitrage transactions Is. As we mentioned above, arbitrage is actually profiting from the same asset at two different prices. You are likely to miss a lot of arbitrage opportunities when you trade manually. But when this strategy is combined with high frequency trading, you can easily take advantage of the smallest times when arbitrage opportunities arise.
Prerequisites for using HFT trading
To benefit from high frequency trading, you must have high experience and skill. Because HFT traders need high speed of action along with a lot of experience and knowledge. You should be able to analyze the market well when using HFT for your trading. So one of the prerequisites of this method is awareness Technical and fundamental analysis Is. Also, to use this trading method in your strategies, having skills in these analyzes is also necessary and efficient.
Do you have experience in high frequency trading? What tool do you recommend for this?
What is high frequency trading? The first time in the blog Valx. appeared.