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When people first discover Forex, they are almost always driven to high-frequency trading.
It’s the trendiest subject in most chat rooms and forums, and brokers are strongly promoting it (so it must be real, right?) Not to mention that it appeals to the adrenaline junkie in all of us.
Let’s be honest: we want to do it because it’s fun, at least at first. Traders are drawn to fast-paced techniques because they desire instant satisfaction and feel that with the promise of numerous trading opportunities comes the promise of quickly becoming wealthy.
High Frequency Trading and its attraction:
The entire concept of high-frequency trading is to open positions for very short periods of time, often as little as a few seconds. This frantic in-and-out trading is the ‘excitement’ that inexperienced traders want.
Even if they only get breadcrumbs, it’s a wild journey.
The trader has been ‘conditioned’ to think in terms of high-frequency trading. It may be a difficult cycle to break free from since no one wants to confess failure or realise that what they’ve been doing isn’t working.
Traders who use high-frequency trading tactics will eventually discover they are flogging a dead horse.
The fact is that the high-frequency trading strategy simply does not function in the market.
High frequency trading, especially scalping, necessitates spending several hours hooked to monitors following minute-by-minute action.
If you go to the restroom or the kitchen for a cup of coffee or anything to eat, you may lose out on the trading opportunity you’ve been looking at the charts for the previous 3 hours.
Sitting in front of the charts for an extended period of time is psychologically and physically exhausting.
Your mind can only absorb so much before it shuts off. How long can you sit in front of charts and keep your mind focused?
How long until you become exhausted and start making poor trading decisions? What is the point at which boredom sets in and you start pressing transactions simply to get something done?
Trades should be opened only when the odds are in your favour, not because you want mental stimulation.
No Room for Error
Profit objectives for high-frequency trading systems are often relatively minimal. Making a fair return for the day necessitates the high-frequency trader accumulating an alarming number of winning deals to guarantee their efforts are worthwhile.
By exposing their account to an unhealthy degree of risk, most high-frequency trading platforms encourage poor money management. In general, a high-frequency trading strategy asks you to take on too much risk in exchange for tiny rewards. Risk-to-reward ratios are typically negative, which is a major warning sign in my opinion.
In fact, the losses are so large compared to the gains that a single lost transaction may leave you in a deep hole that is difficult to get out of.
The scalper’s following four transactions must be profitable in order to return the account to the ‘break even’ level.
Of course, this is assuming that all transactions utilise the same lot sizing. High-frequency traders also utilise erratic money management, which is likely owing to the fact that choices are made swiftly and ‘on the fly.’
It’s terrifying how quickly high-frequency trading may go wrong. For starters, the odds of your following four transactions being successful are stacked against you. In this scenario, the permitted margin of error is only twenty pips.
That’s not much when you realise that the typical day-to-day market volatility is three times higher. The transaction is stopped-out if the market hiccups in the incorrect direction. While the high-frequency trader is attempting to recover from losses, each stop-out deepens the hole by four risk factors.
To make a negative risk/reward method work, you must accumulate a disproportionate number of winning transactions over losing bets. A defeat at any moment is a major setback.
When high-frequency trading tactics force accounts ‘into the red,’ the sense of despair and pressure grows exponentially. This causes tension, which leads to impulsive and emotional Forex trading blunders.
In my opinion, no high-frequency trading system (or any trading method) will operate in the long run unless the risk/reward ratios are good.
No Stop loss
Until now, we’ve assumed that high-frequency trading methods employ a stop loss. I know most of them don’t because the stops they’re usually compelled to employ are so tight that any slight movement in the market would knock the trade out.
These sorts of vibrations are caused by routine day-to-day market activity, such as when major commercial organisations do international currency transactions, which add to day-to-day volatility.
Because there is no stop loss, you must continually monitor your trade and determine whether to manually close it. When the market is volatile, high-frequency trading techniques run the danger of becoming entangled in re-quote mistakes.
It’s not a situation you want to be in. The mainline is that gazing at price charts all day/night is not a healthy habit that can lead to anxiety disorders, and not employing a stop loss is insane!
High on Emotion
High-frequency trading methods are highly emotive endeavours that appeal to people seeking a tremendous adrenaline rush. Short-term traders can be so disengaged from the discipline that many of their trading decisions are based solely on ‘gut feeling.’
There is a lot at stake with each new position created for such minute earnings. High-frequency trading strategies may place a high value on each trade. Traders might get too focused on the performance of a single position.
Guess what happens when a lost deal is eventually closed? The vengeance trade. This is frequently another terrible deal involving the same pair (all while harbouring a grudge and assuming you’ll ‘get your money back).
It’s seen all the time when people lose their calm and trade emotionally. The relentless pursuit of pricing and the ebb and flow of emotions gives a trader the impression that they are ‘fighting the markets.’
It is generally known that emotions and trade make for a hazardous combination. Using a high-frequency trading system, which may quickly amp up these emotions to dangerous levels, isn’t doing you any favours. The market is unforgiving. When a trader succumbs to pressure and reveals their emotional cards, the market will use these feelings and use them against the trader.
High-frequency trading is one of the most difficult trading strategies to master. Most traders are dissatisfied with their earnings in comparison to the market’s seemingly limitless earning potential. As a result, many assume they can solve the problem by just trading as much as possible. This is one of the motivating factors for the popularity of high-frequency trading tactics.
Overtrading is a major issue for short-term traders. What’s another transaction or two, what’s another twenty if they’re already initiating and closing trades at a fast rate? This promotes the gambling attitude when the trader is no longer thinking in terms of probability and is instead trading based on greed, boredom, desperation, or overconfidence.
Your approach to the market will define you as a trader. You believe you’re after money, but what you’re really chasing is your own tail.