How to Outsmart those Irksome, Powerful High-Frequency Traders

Many believe that in the not-too-distant future, the fate of the world will be decided in an epic battle between humans and machines. In the forex world, this war is already experiencing digital practice runs – except, it’s the fate of the trade that’s at stake. High-frequency traders (or HFTs) are forex platforms that use ultra-powerful computers and complex algorithmic formulas to trade at remarkable speeds no human can compete with. The use of HFTs has sparked a passionate debate among traders and investors; some believe that they distort the landscape in an unethical way – almost to the point of being insider dealers – while others point out that HFTs are good for stabilising highly volatile markets, and that the technology can help increase returns.

Either way, you slice it, HFTs have forever changed the online landscape of the equity markets, and have had a major influence on forex as well. Traders with a competitive drive feel that humans have to band together and – just like that iconic book, The Art of War, taught us – “know our enemy”. This article delves into some ways humans can outsmart those pesky HFTs!

You may be asking yourself, how can us mere mortals even compare to machines that never sleep and have the capacity to lock in hundreds of trades every second? It sounds like fighting a losing battle, we know, but there are several ways to fight back, actually. HFTs need a market with good liquidity in order to properly function. Since their goal is large volumes of trade, they’re at their strongest when trading with a lot of parties. Human traders can therefore choose to invest in illiquid markets, such as exotic currency pairs or lightly-traded bonds. While these uncharted waters can be a bit tricky to navigate, as certain write-downs come with severe consequences, commissions are low and the patient investor stands to make a tidy profit in the long run.

Then again, if you don’t have the patience required for trading in illiquid markets, you can switch to the polar opposite side of the spectrum. HFTs and their cold algorithmic trading techniques have a tough time manipulating markets that are super liquid – these would include the most commonly traded currency pair of all, the EURUSD, as well as high-volume stocks, for example. The number of transactions is so high that the algorithms start to trip up over themselves, which levels the playing field between humans and machines, creating a balance that makes things a lot fairer. Not to mention that investors tend to really love the high-liquid marketplace since combining low- and high-volume assets, and diversifying portfolios, has the potential to drive profits through the roof at lower risk.

As you may have gathered, the area where HFTs are at their most powerful is somewhere in the middle. That’s where human traders have to be on highest alert. Markets where there are enough parties to trade with, but not too many transactions happening (good examples are minor currency pairs like the EURGBP) – that’s where algorithms have a big home advantage. On the other hand, people have the edge when it comes to reading between the lines of human language. HFTs do their own fundamental analysis by scanning news headlines, but if the headline is open to interpretation, in any way ambiguous or ironic, chances are the computer won’t get it. So there are ways that the automated platform can take wrong turns, leaving human traders to drive ahead and count themselves lucky for having the power of reason that can discern nuances too subtle for artificial programmes.

With that being said, however, you can’t sidestep HFTs all the time. Humans will have to compete with automated platforms occasionally – it’s inevitable. With that in mind, one last piece of information we’ll leave you with as you prepare to battle the machines is: stay in shape. That old adage of “Healthy body, healthy mind” rings true for traders especially, as staring at computer and smartphone screens in a (often) seated position for hours on end wears anyone down both physically and mentally. Humans need to rely on their rational minds to stay focused and make clear decisions when trading if they wish to compete with computers that never experience fatigue. So, physical exercise is a must if you want to stay fresh! It’s been a while since we read it, but we‘d be surprised if The Art of War didn’t have a chapter on that as well.

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Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.

NOTES TO EDITORS

The FXTM brand provides international brokerage services and gives access to the global currency markets, offering trading in forex, precious metals, Share CFDs, ETF CFDs, and CFDs on Commodity Futures. Trading is available via the MT4 and MT5 platforms with spreads starting from just 1.3 on Standard trading accounts and from 0.1 on ECN trading accounts. Bespoke trading support and services are provided based on each client’s needs and ambitions – from novices, to experienced traders and institutional investors. ForexTime Limited is regulated by the Cyprus Securities and Exchange Commission (CySEC), with license number 185/12 and licensed by the SA FSB with FSP number 46614. Forextime UK Limited is authorized and regulated by the Financial Conduct Authority in the UK, firm reference number 777911. FT Global Limited is regulated by the International Financial Services Commission (IFSC) with license numbers IFSC/60/345/TS and IFSC/60/345/APM.