Do you want to trade currencies without having to invest a lot of time and effort?
This is exactly what you can do when you leverage automated Forex trading software. Rather than enter and exit trades manually, a robot or computer does the work on your behalf.
Sounds good?
Before you hand over your trades to a Forex expert advisor (EA) or robot, however, you should perform your due diligence. While the concept seems simple, there's more to the process than just straightforward automation.
In this article, we'll delve into the various aspects of automated forex trading and how you can use the system to your advantage.
Quick navigation
- What is automated trading?
- What are the advantages and drawbacks of automated trading?
- Automated trading software: Expert Advisors vs. Forex Robots
- How to choose between Forex Robots and Expert Advisors
- How to choose the best automated trading platform
- What do you need to create an automated forex trading program?
What is automated trading?
Automated trading uses a pre-programmed algorithm that decides what and when to buy and sell assets, depending on the instructions written in the code. Unlike manual trading, the decision to buy or sell is made by the bots or software and not the trader.
An intraday Forex trader, for example, who trades manually will analyse a list of different currency pairs and use indicators and other tools to determine their next move. On the other hand, an intraday Forex trader who automates their trading strategy will rely on robots to act on a trade based on predetermined instructions.
You use a system that is configured to analyse currency price charts and market activities. Once it identifies key trading signals such as unstable price patterns, trading is executed automatically.
Using automated trading software, you can set criteria that will determine your trade's entry and exit points. You're basically telling the system to execute a trade if and when specific points of entry and exit are satisfied.
For example, you configure the system to open a short trade if the 25-day MA (moving average) crosses under the 100-day MA within a 5-minute timeframe.
An automated trading system can be categorised as Expert Advisors (EAs) and Forex robots. It can be simple or complex, depending on your knowledge of programming languages. Clearly, the more complicated systems require a good command of the language used by your trading platform.
If you trade using MT4 or MT5, the programming language used is MQL4 or MQL5, respectively.
An automated trading system is also referred to as algorithmic trading, system trading, or mechanical trading systems.
What are the advantages and drawbacks of automated trading?
Automated systems not only reduce the hassle and stress of Forex trading, but they also provide you with several other benefits.
Advantages of automated trading
Removes emotions out of the equation
Emotional trading is every trader's downfall, regardless of the instruments invested. Once you allow your personal feelings to affect your trading decisions, the outcome can have a massive effect on your portfolio and peace of mind.
Educate yourself on the 5 Guaranteed Ways to Lose Money in Forex Trading to protect your equity.
If you use robots or EAs, however, trades are executed without input from you or any decision-making on your part. You don't need to experience greed or the fear of missing out, just pure logical moves as executed by the automated trading software.
Develops discipline and trust in your trading plan
More often than not, trades fall through because you didn't trust your process. Even with a trading plan in place, you take one look at the chart and then deviate. However, when that decision is taken off your hands, you will learn to trust the system you set.
This results in you following your trading strategy precisely and consistently and protecting you from overtrading or entering trades outside of your plan.
Ensures accessibility and flexibility
Automated trading software is used by both beginners and professional traders. The former use it as a guide, while the latter use it as an aid in decision-making. Both, however, use the system to test a trading platform.
Depending on the broker, you can sign up for a demo account to test robots or EAs on offer. You can later switch to a live trading account if the system proves beneficial and profitable.
Leverages backtesting
If you want a profitable automated Forex trading system, you'll need to backtest to identify the appropriate criteria based on historic price data. It's crucial that the conditions you set are absolute.
Since computers lack the ability to make guesses, it's your responsibility to tell them exactly what to do. Careful backtesting will help you create precise trading rules.
In addition, backtesting will give you a glimpse of past trading activities, providing you with historical data that you can use to fine-tune or evaluate your trading plan.
Check out the variety of strategy testers and other features MT5 offers.
Boosts the speed of order entry
Forex EAs can immediately respond to the rapid movements of the financial market. As soon as the predetermined criteria are met, the software will place orders immediately.
In Forex trading, how quickly you get in and out of a trade can make a huge difference. Robots or EAs ensure you don't miss out on the best price or opportunity.
Helps diversify your trades
With an automated trading system, you can trade multiple accounts or use a variety of strategies at one time. You can also manually trade concurrently with robots if you want. This allows for diversified trading activities.
Any potential risks are also spread out and hedging is applied over losing positions. Moreover, robots not only scan trading opportunities across markets but also monitor trades.
Reduces time commitment
With the robots executing trades on your behalf, you don't need to stay glued to your computer.
Performing technical analysis and fundamental analysis is also kept to a minimum since you've done the bulk of it while developing preprogrammed/predetermined instructions for the Forex bots.
The time you're supposed to spend on charts and analysis you can spend with friends and family instead. If you have a full-time job, you can focus on that as well and let the robots execute your trades.
Drawbacks of automated trading
Despite the ease and convenience that an automated trading system presents, they do come with certain disadvantages that you need to be aware of.
Monitoring is still required
Unlike a plug-and-play system, you need to monitor your EAs or bots to ensure they're up and running. Technical failures such as loss of or poor internet connection can cause the system to fail. The software itself could also break down, resulting in missed trades or duplicate orders.
Automated systems are not perfect. Thus, the need for occasional monitoring to prevent discrepancies and problems.
Higher risk of over-optimisation
This occurs when the strategies you implement look good on paper but perform poorly on a live market. Backtesting can have this effect.
Because you've seen your past errors as you backtest, you could end up developing a trading plan that you think will work perfectly but won't when implemented.
Automated trading software: Expert Advisors vs. Forex Robots
As previously mentioned, automated Forex trading systems are categorised as EAs and robots. Both are designed to analyse market trends and identify points of entry and exit. However, the former only provides you with trading signals, while the latter executes the entire trading process automatically.
It's important to understand that automated trading systems are not entirely risk-free and you can still lose money, especially during uncertain periods. Their disadvantages say as much. Most robots are also limited to trading within a certain amount of pips or during a positive trend.
How to choose between Forex Robots and Expert Advisors
It depends on whether you want to simply acquire trading signals that you can use to execute your trades or leave all the work to robots.
Most beginners are likely to rely on Forex bots while they're still starting out. On the other hand, some professional traders would want to take shortcuts and let the EAs run the analysis for them or identify strong and weak currencies but maintain full control of their trading decisions.
Either way, you will enjoy the advantages that both automated trading systems provide.
How to choose the best automated trading platform
Check that the automation system is server-based
Computer-based automated software is at a higher risk of technical failures. A sudden loss of internet connection can result in orders not sent to the market, which can mean lost profit. So sign up with a provider of server-based automation instead.
Assess the provider thoroughly
Doing so is the best way to avoid scams. Be wary of platforms/software sold at a lower price but promise high profits. Check out testimonials and reviews from third-party websites.
Look for offers of a trial period
Most scam websites would not allow you to test the system for free within a certain timeframe. How else can they make off with your money if they do?
For your peace of mind, use automated trading software that is trusted and recommended by other Forex traders.
What do you need to create an automated forex trading program?
You can buy or create your own automated Forex trading system. If you prefer to customise your own, you're going to need the following:
- A detailed trading plan that outlines the strategy you will use, risk-reward ratio, and execution rules.
- Tools and indicators that dictate how trades are placed.
- Risk management tools such as a trailing stop or basic stop loss to protect your equity.
- Appropriate coding language to program your automated Forex trading system.
Once you've designed and run your trading system, make sure to backtest for efficiency and efficacy and refine it as needed.
Are you ready to automate your trades?
Before you do, make sure that this is the strategy for you or the one that you want to explore. Setting up the system takes time and doesn't always guarantee profitable trades. You could be better off trading manually.
But if automation matches your end goal, then take advantage of it. Remember to minimise drawbacks by choosing a reliable and legitimate provider and continuously educate yourself about automated trading.
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