Difference Between High frequency and Low Risk Trading
Trading experts always refer to high-frequency trading and low-risk trading.
But what does it all mean and is there a difference between these two trading techniques?
Yes, we all know that they differ in terms of risk. But what are the differences apart from risk?
Is it a limit price that helps avoid high losses in low-risk trading?
Or is there something else about market orders?
Learn more about low-risk trading and high-frequency trading than just some basic features. The basic features are stop limit order or stop-loss order. So let us start with this post.
What is low risk trading?
First of all, you need to understand the meaning of low-risk trading. As the name suggests, it involves trading financial instruments with low risk. Traders buy assets at the same market price. It does not matter whether a trader is associated with a high-frequency or a low-risk market.
The buy or sell order is executed at the current buy price. However, the orders are executed with the Buy Stop (Stop Loss) function.
Execution stops when it reaches the trailing stop price. This function is used for risk management.
What is high-frequency trading?
The terms high-frequency trading and high-risk trading have different meanings. However, high-frequency trading involves a high level of risk compared to low-risk trading.
For this reason, some market makers also refer to high-frequency trading as high-risk trading. Here, a financial instrument is traded almost without a stop price. Most of the time, a professional trader trades with high-frequency techniques.
It is about the use of Expert Advisors or trading robots. These trading robots are a type of software used for automated trading. From the trading strategy to the order entry functions, everything is programmed.
The EA or Expert Advisor places an order with the predefined values for ask and bid price. Sell stops and exchange rate variables are also used. With these methods, large quantities of trading orders are placed at high frequency.
Compare both trading techniques
Both types of trading techniques need to be compared. Neither is less important, but it is good to compare them first. Low-risk trading helps you buy a stock or a currency pair and trade with low risk.
At the same time, the chances of making profits are lower. If you issue the same share price with high frequency, the opposite condition occurs.
This is not only the case on the stock exchange but can also happen in foreign exchange trading. Unlike in foreign exchange trading, traders of exchange-traded funds (ETFs) have the same privilege.
Will you compare both trading approaches with market volatility or just liquidity? There are some other important differences you should consider. Let us think beyond price triggers, constraints, execution, etc.
In high-frequency trading, the market is very volatile and liquid. This is the reason why some traders prefer this way of raising capital. For this reason, the trading volume in low-risk trading is low.
The success rate is related to the trading volume. And as you know, low-risk trading has a low trading volume and therefore a lower success rate. At the same time, high-frequency trading is associated with higher losses compared to other types of trading.
It is a tip for beginners to opt for this type only after a complete analysis. Experienced traders choose this type of trading because they know how to manage the risk.
Return on investment (ROI)
High-frequency trading offers you high returns at the time the market closes. But it can eat up all your invested money before the market orders run out. Low-risk trading is slightly safer but offers lower returns. Sometimes the return depends on the investment instrument you choose.
With commodities, the return can be higher than with share trading. Calculate the profit after deducting brokerage fees (trading commission) and the cancellation of orders in your order book.
Try to find a risk tolerance ratio for you as a trader. This is important even if you are a shareholder. It will determine where your career in online trading will lead.
Never go into an intraday market (day trading) with a low-risk tolerance. Low risk trading is for traders with a low-risk tolerance. High-frequency trading is for traders with too high a risk tolerance.
What is your risk tolerance?
Before you decide on an investment, you should know your risk tolerance. It's very simple and will guarantee your success. Always calculate your risk tolerance in percentages and not in amounts.
Determine that you cannot tolerate more than ten per cent. It can fluctuate depending on the growth your trade will have in the global market. The risk tolerance helps you decide between low-risk trading and high-frequency trading.
Why should you choose high-frequency trading?
For technical traders, it is interesting to know the advantages and disadvantages of these two trading methods. Low risk trading and high-frequency trading both have a good and a bad side.
Let us start with high-frequency trading and its advantages. Yes, we will also discuss the disadvantages of high-frequency trading.
Pros & Cons
Always prefer high-frequency trading to low-risk trading when you are pressed for time. With this trade, you can overcome your time limit. Using different trading software helps you trade more in less time.
Opt for high-frequency trading if you are not sure about your investment ideas. You do not have to worry about the downside or past performance of a financial instrument.
Going With Low risk trading
Why should one choose low-risk trading or is there a particular reason for it? It all depends on the skills and experience of a trader. For a beginner, it can be a good option.
But for a professional trader, it is not a good idea. So always assess your own trading experience. If you feel that you are experienced, you do not have to trade with low risk.
Pros & Cons
If you are a beginner in a trading market, choose this one. Low-risk trading will help you manage your small capital. You will execute buy or sell orders with stop loss. But it will help you avoid big losses at once.
Low-risk trading never guarantees a risk-free trade. But it can lower your risk so that you stay motivated to trade the market. The only disadvantage of low-risk trading is that you will not get higher returns. This is because you are not taking high risks.
Conclusion: Low risk trading
Is it difficult for a new trader to choose between the two options? Well, many of the new traders will still be confused. But it is quite simple if you read through this post. This post describes what is better for you depending on your trading portfolio.
So take your time to decide between low-risk trading and high-frequency trading. Always behave like an analyst who analyses things technically. Instead of following some common myths. There may be many myths about both types of trading. But you should choose the one that suits you.
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