Forex traders and investors can customize the entrance, exit and rules of money management in automated forex trading systems that allow computers to execute and monitor transactions. One of the biggest advantages of an automation strategy is that it can eliminate any negative and destructive emotions from the trade, because deals that meet certain criteria are automatically executed.
In other words, the chosen program or forex robot performs all trading processes, opens and closes deals while you sit and relax. But is such a trade effective, and if so – how to perform automated Forex trading? In this article we will answer some of the most frequently asked questions so that you get a true understanding of automated trading in the Forex market.
What is an automated trading system?
Automated trading system, or automated Forex trading, allows traders to set certain rules for entering and exiting the transaction, which can be automatically executed by the computer. Trading rules for entry and exit can be based on simple conditions, for example, the intersection of moving averages, or on complex strategies that require a thorough understanding of the programming language on which the Forex trading platform was developed.
Typically, for the application of automated trading systems, you need an application or program that has direct access to the broker, and specific rules that are written in the language of this platform. For example, the most popular trading platforms MetaTrader 4 and MetaTrader 5 use the MQL programming language, whereas the NinjaTrader platform uses the NinjaScript programming language.
Some automated forex trading platforms have built-in “hints” that allow traders to make a choice from a list of available technical indicators to create a set of rules based on which automatic trading will be performed. For example, a trader can set a long-term trade opening when the 50-day MA crosses the 200-day MA on top of the 5-minute chart of a particular trading instrument. Users can also enter an order type (for example, a market or a limit) and a specific transaction time (for example, when the next bar is opened or closed), or use the default settings on the platform. However, most traders prefer to program their own strategies and custom indicators, or work closely with the programmer to create their own system of automated forex trading. This often requires more effort than using platform hints, but self-programming provides more flexibility, so its results can bring significantly more profit.
After setting the rules, the computer will scan the markets in search of opportunities for buying or selling, based on a given trading strategy, and carry out auto Forex trading. Once the transaction is opened, depending on the special rules, protective orders stop loss, trailing stop, and also the target profit are activated. Moreover, in fast moving markets, such an immediate opening of an order can mean the difference between a small loss and catastrophic losses, in the event that the transaction goes wrong as planned by the trader.
Advantages of automated trading and automated systems
Let’s take a look at some of the advantages of automated forex trading. The first advantage, which we already wrote about earlier, is that automated trading minimizes the influence of emotions in the trading process. If a trader keeps his emotions under control, it is usually easier for him to stick to his basic plan. Since transaction orders are executed automatically, as soon as the situation on the market matches the specified parameters, forex traders will not have a single chance to doubt the feasibility of planned actions. In addition, automated trading helps prevent excessive trade, that is, buying and selling occurs only if there are real trading opportunities.
The next advantage is the possibility of backtesting. Backtesting allows you to apply the rules of trade on historical market data to determine the viability of the idea. Developing a system for Forex automated trading, all the rules should be clear and unambiguously prescribed, that is, the computer must clearly understand what needs to be done.
In addition, Forex traders can use these rules and check them on historical data before risking real money in real trading. Attentive backtesting allows traders to evaluate and debug a trading idea, as well as to identify system expectations – the average amount that a currency trader can win (or even lose), per unit of risk.
Forex auto trading also supports discipline. When trading rules and transactions are established automatically, discipline is observed even in volatile markets. In the currency market, discipline is often lost due to emotional factors, such as fear of loss or the desire to get even more profit from the transaction. Automated trading helps ensure that discipline is observed, that is, a clear adherence to the trading plan. In addition, the probability of a trader’s mechanical error is reduced, and an order for the purchase of 100 lots will not be entered with an extra zero, as an order to purchase 1000 lots.
It would be a mistake not to mention one more important advantage – automated trading helps to achieve consistency. One of the biggest tests in Forex trading is planning a deal, and then trading according to plan. Even if the trading plan has good chances to bring enough profit, traders who ignore the rules, change all the results that the system, in fact, could bring.
You should understand that there is no trading plan that wins all trades with a probability of 100% – losses are always part of the game. Nevertheless, losses are dangerous from a psychological point of view, since the Forex trader, who already had two or three losing trades in a row, may decide to skip the next deal. And just this next transaction may turn out to be winning, but the trader has already destroyed the expectations of the system. Thus, forex trading systems allow traders to be consistent.
Another advantage is the increased speed of execution of orders. Because computers respond instantly to changing market conditions, automated systems can create orders as soon as trading criteria are met. Therefore, entering or leaving the transaction in a few seconds can seriously affect the outcome of the trader. Once the position is open, all other orders are automatically created, including defensive target profits and stop loss. You know that markets can move very quickly, so it’s very sad if the transaction has reached the target profit level, or flew past the stop loss level before the order was opened.
Finally, the last advantage is that you can diversify your trading. The automated forex trading platform allows the user to trade on multiple accounts or different strategies simultaneously. In turn, it has the opportunity to share the risk on different instruments, while hedging the loss-making positions. The program can scan trading opportunities in several markets, create orders, and monitor transactions.
Against automated trade and automated systems
Despite the advantages, you should understand that automated trading is also not devoid of certain drawbacks.
The program is still a program, so from time to time it may cause technical errors. Auto Forex trading in theory seems pretty simple: you need to install a program, program the rules and watch how it trades. However, reality does not always reflect expectations. Automated trading can not guarantee a 100% probability of success. Depending on the trading platform, the trade warrant can, in fact, be on the computer, not on the server. This means that if you have a connection with the Internet, the order will not be sent to the market. There may also be a discrepancy between the so-called hypothetical transactions created by the strategy, and the elements of entering orders on the platform, which turn them into real deals.
The second negative is monitoring. Of course, it’s very tempting to turn on the computer and go for a whole day, but automated shopping systems still need supervision. With an automated trading system, a technical malfunction may occur – there may be connection problems, computer malfunctions, power drops or other system failures. The system of auto Forex trading can function with errors, for example, issue wandering orders, skip or even duplicate orders. If the system is monitored, such errors can be quickly identified and corrected.
And the most obvious drawback is excessive optimization. Although this is not typical for auto currency trading systems, forex traders who use backtesting techniques can create systems that look great on paper but work terribly in the real market. Thus, excessive optimization leads to the construction of an unrealistic curve, because of which the trading plan is not viable in real trading. For example, you can configure a strategy to achieve exceptional results on the historical data on which this strategy was tested. Traders sometimes make the wrong assumption that a trading plan should guarantee almost 100% of profitable trades or should never show a drawdown, then it can be considered a good plan. The set parameters can be adjusted to create an “almost ideal” plan,
We hope that after reading this article you could find the answer to the question – what is Automated Forex Trading? Although automated trading may seem attractive for a variety of reasons, such systems should not be considered a substitute for permanent trading. Technical mistakes can not simply arise, they actually arise, so the system needs control. Platforms based on the server can provide a good solution for traders who want to reduce the risk of mechanical errors. We suggest that you combine manual and automated forex trading to achieve the best results.