Rise of the Killer Trading Bots: How AI Displaced Human Forex Traders

The foreign exchange (forex) market has seen a seismic shift in recent years with the rise of automated trading systems and artificial intelligence. Once dominated by human traders, high-frequency algorithmic “trading bots” now account for over 70% of trading volume in the $6.6 trillion per day forex market. This has led to massive disruption, with many human traders being displaced by lightning-fast AI programs.

In this comprehensive guide, we’ll explore the emergence of killer trading bots in forex, how they work, their advantages over human traders, and whether they spell the end for human participation in currency trading.

Contents

• History and Growth of Algorithmic Trading Bots
• How Do Forex Trading Bots Work?
• Key Advantages of Trading Bots Over Humans
• Major Providers of Forex Trading Bots
• Controversies and Downsides of Trading Algorithms
• The Future of Human vs Automated Trading
• Conclusion

History and Growth of Algorithmic Trading Bots

Algorithmic trading programs have been around since the 1970s, but their application in retail forex trading is relatively new, only taking off in the 2000s.

These automated trading systems are designed to follow predetermined rules for analyzing market conditions and executing orders without human intervention. Trading bots can monitor price charts, news feeds, and economic calendars to generate and act on trading signals at speeds impossible for any human.

In the early days, trading bots were mostly used by investment banks and hedge funds. But in recent years they have become more accessible to retail traders through brokerages and 3rd party services. Companies like eToro, TradeStation, and QuantConnect now offer forex trading bots to regular investors.

The proliferation of trading algorithms has corresponded with massive growth in forex market volume and liquidity. Daily turnover has exploded from around $1.5 trillion in 2004 to over $6.6 trillion in 2019, making forex larger than all global equity markets combined. This explosion in volume created ideal conditions for trading algorithms to thrive.

How Do Forex Trading Bots Work?

Forex trading bots use mathematical formulas and rules-based logic to analyze market conditions and execute orders independently. The most common types of trading algorithms include:

Trend-following – These bots ride established uptrends or downtrends, buying and selling based on indicators like moving averages. They aim to profit from the momentum of long-term price waves.

Arbitrage – Arbitrage bots exploit momentary price differences between forex pairs and exchanges to lock in small, low-risk profits.

Pattern recognition – Pattern bots identify historical chart formations like head and shoulders or wedges to predict future movements and place trades accordingly.

High-frequency – The fastest bots exploit tiny intraday price discrepancies across markets, placing millions of trades per day in milliseconds.

Machine learning – Advanced algorithms use neural networks to “learn” trading strategies based on vast amounts of historical market data. The system continually optimizes its approach.

Trading bots can be fully automated or involve some human oversight. But they all share the ability to scan markets, interpret data, and place orders much faster than humans can comprehend. Speed is their primary advantage.

Key Advantages of Trading Bots Over Humans

Trading bots have many inherent strengths that make them well-suited for forex trading:

• Speed – Bots react to price changes and place orders in milliseconds, giving them a huge edge over humans. This allows them to capitalize on fleeting opportunities.
• 24/7 operation – Algorithms can monitor and trade markets continuously without breaks, holidays, or human error. They don’t get tired or distracted.
• Discipline – Bots strictly follow programmed strategies without succumbing to emotion, greed, or panic. Humans are prone to bias and irrational decisions under pressure.
• Low costs – Trading bots don’t require salaries, healthcare, bonuses, or other overhead costs associated with human traders. They are much cheaper to run.
• Scalability – Trading algorithms can monitor and trade a high volume of markets simultaneously. Adding more markets doesn’t increase costs proportionately.
• Backtesting – Backtesting on historical data allows developers to refine trading strategies before risking real capital. Humans can only paper trade, not replay past market scenarios.

These advantages have allowed trading algorithms to displace an increasing number of professional human traders who cannot compete on speed or efficiency.

Major Providers of Forex Trading Bots

A variety of companies now offer pre-built trading bots and algorithms tailored for the retail forex market:

• MetaTrader – The popular MetaTrader 4 and 5 trading platforms allow users to code and backtest trading robots using MQL programming language. Traders can share bots via the MetaTrader Market.
• eToro – This social trading network offers users a selection of customized algorithmic trading strategies. Users can automatically copy the trades of eToro’s most successful algo traders.
• QuantConnect – QuantConnect provides access to a cloud-based algorithmic trading platform. Users can develop trading bots in C#, Python, or F# and run live or historical backtests.
• TradeStation – TradeStation offers the EasyLanguage programming language for coding custom trading strategies and bots on its desktop and web platforms.
• Deltix – Deltix develops high-performance trading algorithms for quantitative hedge funds and banks. Retail traders can license algos for currencies, stocks, futures, and options.
• Darwinex – This UK-based brokerage offers traders access to a marketplace of third-party trading algorithms vetted by Darwinex.

In addition, more brokerages now offer trading signals and copy trading features that mirror algorithmic strategies for clients. So forex traders today have more bot trading options than ever before.

Controversies and Downsides of Trading Algorithms

The rise of trading bots has generated plenty of controversy and heightened old concerns about technological disruption of markets:

• Unfair speed advantages – Trading bots can gain split-second speed advantages over human traders by locating their servers physically closer to exchanges. This raises questions around fairness and equal access.
• Increased volatility – Critics argue bots amplify volatility by detecting and reacting to price changes faster than humans can process information. Their hyperspeed trading activity may move markets more violently.
• Potential for manipulation – Trading algorithms could be used to manipulate markets through practices like spoofing, layersing, wash trading, and aggressive high-speed trading around key liquidity points.
• Loss of human judgment – Unlike humans, bots cannot exercise reasoned discretion, judgement, or intuition. They follow rigid programs that may break during unpredictable events.
• Systemic risk – Interconnected trading bots reacting to code could potentially trigger cascading selloffs, flash crashes, or other systemic issues. The 2010 Flash Crash was blamed partly on high-frequency algorithms.
• Redundancy of human traders – Widespread use of trading bots renders many human traders redundant. This results in job losses and changing skill requirements for the industry.

These controversies have prompted regulators to introduce speed limits, governance controls, and other policies to minimize risks from algorithmic trading domination. But concerns linger over the scale of disruption caused by bots in currency and other markets.

The Future of Human vs Automated Trading

Given the unstoppable momentum of algorithmic trading, is there any future role left for human discretion and intelligence in forex markets?

Increasingly, experts believe successful human traders will be those leveraging technology alongside human capabilities like creativity, imagination, and relationship-building. The optimal approach is man + machine.

Below are several ways humans can continue participating in the forex trading ecosystem:

• Developing trading algorithms – Humans with programming skills are needed to code, optimize, and refine automated trading systems. This requires an understanding of forex fundamentals combined with coding ability.
• Combining bots with discretion – Traders can use bots for trade execution while still making strategic decisions on portfolio allocation, risk management, and identifying new opportunities.
• Providing liquidity – Market makers and other professionals will provide the liquidity and activity algos need to function efficiently. Humans facilitate transactions.
• Sales and client interaction – Client-facing roles explaining trading products and strategies to investors will retain a human touch, even when bots execute the actual trades.
• Regulation and governance – Humans are still needed to monitor automated trading practices, introduce governance policies, and regulate markets to prevent manipulation and mishaps.

So while the future role of humans in forex trading will evolve, it is unlikely to disappear completely. The individuals who embrace technology while focusing on uniquely “human” strengths may be best positioned for the algo-dominated markets ahead.

Conclusion

The rise of high-speed algorithmic trading bots has been one of the most disruptive forces reshaping currency trading this century. Powered by speed, efficiency, and relentless discipline, trading algorithms now dominate forex markets.

While controversies persist around fairness, volatility, and redundancy of human traders, automation has delivered benefits of lower costs, tighter spreads, and 24/7 liquidity accessible by more investors globally.

Rather than competing against algorithms, successful human traders of the future will embrace technology. Combining automated trading tools with human insight, relationships, and oversight will lead to optimal outcomes for both traders and the broader forex ecosystem.

Those who can adapt to the new bot-driven trading paradigm stand to harness exciting opportunities at the intersection between human and artificial intelligence.