Understanding Forex Automated Trading

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Contributor, Benzinga
November 8, 2022

Almost every forex trader has wondered about automating their trading at some point, and it isn’t hard to understand why. Trading forex can be difficult, emotionally exhausting and time-consuming.

Still, automated trading requires much more than just pressing a button and letting the system run. Automated forex trading comes with trade-offs, which are discussed in this article.

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What is Forex Automated Trading?

Automated forex trading is a type of trading where all the trading inputs (entry, stop-loss, take profit) fall under the machine’s control. Automated trading systems follow pre-specified strategies without deviating from those rules. Their instantaneous reaction time gives them a clear advantage over manual trading.

How Does Forex Automated Trading Work?

Automated trading works through algorithms — a finite sequence of clearly-defined instructions that define the decision tree for entering and exiting the trade.

Building an algorithm requires solid trading knowledge, some programming experience and plenty of time to test and optimize in live trading. While there are black box systems for purchase, finding a profitable automated turnkey trading system is not as straightforward as it seems.

Advantages of Automated Forex Trading

Automating trading strategies have multiple benefits. Consider the following:

  • Avoids human error: Humans are imperfect. Many anecdotes involve human mistakes that resulted in disastrous and unintentional winning trades. On the contrary, a machine only does what it is told and cannot step outside those bounds.
  • Eliminates emotions: Trading under stress is one of the traders’ greatest enemies as emotions influence decision-making. Meanwhile, the machine strictly follows the rules without external deviations. 
  • Offers backtesting: Modern trading platforms offer datasets, giving a chance to test automated strategies on past market movements. This opportunity is the cornerstone of automated trading as it allows initial profitability expectations and further optimization.
  • Improves entry speed: Human reactions have a delay, while the machine acts instantaneously. This advantage can have severe consequences for trading systems that rely on speed, making the difference between winning and losing in the long run.
  • Increases opportunities: A human can only monitor so many markets before losing focus. While a machine does have hardware limitations, it still has a vastly higher capacity than an average trader. This advantage means it can track multiple markets and, consequentially, spot and trade more viable setups — ultimately making more profits.

Disadvantages of Automated Forex Trading

Automated forex trading is not perfect. Here are a few issues that might arise when using automated trading setups.

  • Needs some level of knowledge to set up: Pre-required expertise can be a barrier to entry with automated trading. Unless using a black box system or trade copier, building, testing and setting up an automated trading system requires a solid knowledge of trading and programming ability.
  • Prone to mechanical failures: Machines are not perfect. They require maintenance and occasionally break down, resulting in missed or lost trades. Thus, they need periodic supervision. 
  • Requires a dedicated hardware setup: For any form of serious use, automated trading systems need a dedicated system to run 24 hours per day. Usually, it means renting a reliable VPS to ensure connection stability and fast execution, but it also creates an additional cost.

How to Start Auto Trading Forex

Switching to automated trading is a big step for every trader. There are several ways to do it, such as the following:

Copy Trading

This form of trading, also known as social trading, revolves around online communities that attract star traders and compensate them through subscriptions and volume-based commissions. Complete beginners often pursue social trading, but one of its biggest challenges is finding a reliable, consistent trader to follow.

Trading Signals

This similar but less sophisticated method is more difficult since the trader has to input everything by themselves. Because of human interaction, this method is more likely to result in errors. It is time-consuming since traders have to monitor the channel of delivery — usually social media, email or instant-messaging groups.

MT4/5

MetaTrader is arguably the most popular forex software provider, offering automated trading as well. It works through expert advisors (EAs) that execute trades based on pre-defined rules written in the MetaQuotes language based on C++.

Broker-Based Automated Trading Platforms

Additionally, with social trading, some brokers offer intuitive options for building automated trading systems. These web applications are known as EA builders and require no coding experience. However, they need extensive trading experience as the system's success ultimately depends on defining and combining a narrow set of rules. The final result is a trading system that works on a broker's web or desktop-based platform.

Automated Trading vs. Manual Trading

Automated trading has advantages over manual trading in speed and consistency; however, only some things are quantifiable. Regardless of the similarity between the trading setups, few market situations are truly identical in a way where the strict pre-defined set of rules will be the best approach.

While automated trading works by smoothening the results over the long run, manual traders are more flexible. An experienced manual trader will trust the gut feeling — instinctively knowing when to bend the rules and perhaps risk a little bit more or a little bit less. This approach is not random but comes with accumulated experience over the years.

Automate to Save Time, Not Effort

Automating a forex trading system is a catch-22. It is most desired by those who lack trading knowledge and ability, yet it is easiest to obtain for those who are already skilled traders. Developing trading ability is a marathon where crawling comes before walking, which comes before running, and, eventually, long-distance races.

While automated trading strategies work, if you are closer to the beginning of your forex trading journey, you could expand your knowledge using Benzinga’s forex educational library.

Frequently Asked Questions

Q

Is automated trading effective?

A

Automated trading is effective in saving time since specific trading strategies are time intensive. Automated trading eliminates human error as the machine doesn’t have emotions. It operates only within the given parameters.

Q

Is automated trading illegal?

A

No, automated trading is not illegal. While there are arguments against automated trading, those issues are mainly related to high-frequency institutional trading that sometimes causes a rapid decline known as a flash crash.

Q

Is a trading robot profitable?

A

A trading robot is only as profitable as the strategy behind it. Furthermore, it might not perform as well under different market conditions; thus, it requires extensive testing. In trading system design, a rule of thumb is to take the backtesting results, half the profits and double the drawdown to get a realistic orientation about its performance.

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About Stjepan Kalinic

Forex, Equity Analysis, and Financial Education