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Automated Trading

Automated TradingWhen trading in financial markets, traders often use several strategies. Until recently, they had to spend a lot of time and effort to meet all the necessary requirements for the level of profitability and risk management. They needed to research and test a lot of strategies in order to determine which one works best and brings the most profit. Today, these tasks can be done by specialized software, so automated strategies have recently become very popular with traders.

What Is Automated Trading?

It refers to managing a trading account with the help of a software program, typically built into a trading platform. These programs are often called trade robots or expert advisors (EA). A trading robot or EA is a program that can perform any actions in the terminal according to the trader's instructions and without the direct participation of the trader. The trader installs the program in the existing terminal, configures all of the necessary settings (stop loss, take profit, etc.), and then the advisor starts trading according to the strategy programmed into it.

Today Forex brokers offer the services of a wide variety of advisors. Experts warn against the use of advisers that have successfully worked in Forex under certain conditions, but as soon as the nature of the market has changed, they have become ineffective or completely useless. As a rule, such programs become available for free download on many sites, so it is important not to fall in this trap.

Automated Trading Strategies

Here are some popular strategies for auto trading:

Double Sevens

This strategy is based on the use of a moving average. A buy signal is given when trading models are set above the moving average, while the sell signals are given with the corresponding models below the moving average. When the bar closes at the highest or lowest value, the previous seven bars are closed at the same time, and the adviser makes a purchase or sale, respectively. The strategy can bring 60% of the profit from more than half of deals with profitable closure. However, it does not use the stop loss or take profit orders, so the loss can exceed the profit.

Trend RSI

It is a simple strategy that is based on using the RSI indicator as a trading signal. When the RSI rises above 73 or falls below 27, an order is placed to buy or sell a currency pair. EA uses the Average True Range (ATR) to set the output prices. When a trend is entered, a stop loss is set - three ATRs after the price entry. When the price moves in favor of a trader with more than three ATRs, the stop loss is set to break-even. In all other cases, the trailing stop of the three ATRs is used when closing a position.

MACD Pivot Point

This strategy works best on a fifteen-minute chart with major pairs such as EUR / USD or USD / JPY. A specific EA works with USD / JPY. The MACD Pivot Point strategy is more complex than the previous two and includes a unique indicator based on MACD. It is called the exponential moving average MACD, or EMA from MACD. The strategy also uses pivot points to make trades.

Benefits of Automated Trading

Auto trading has the following advantages for the trader:

  • Full automation and the absence of "human factor". The robot does not know emotions, it is not afraid and has no doubt, does not reflect and does not guess. With automated trading, robots themselves analyze the market, wait for signals, and make trades according to a given algorithm. They are not subject to psychological influence.

  • High speed of transactions. Robots open and close transactions immediately at strictly specified prices. That is, deals are opened and closed according to the type of pending orders and the price does not have time to rebound far from the current value.

  • Round the clock trading. Unlike humans, the robot does not get tired. This allows you to trade around the clock, even at night, when the market still gives good signals.

  • Flexibility and control. Any automated trading system can be configured and customized according to your needs. Everything depends on the result of transactions made by robots.

Drawbacks of Automated Trading

And here are the disadvantages of auto trading:

  • High costs. It is hard to build a robot that will make the right deals and bring profit. Therefore, profitable automated systems are very expensive. Prices range from $15 up to $1000 and higher. The high price of a robot speaks of its reliability and profitability.

  • Malfunctions. Trading robots, like any computer program, can deviate from the correct algorithm of work. Due to failures in the settings, trading becomes unprofitable.

  • The computer has to be constantly online. In order for the robot to open trades around the clock, the terminal must be constantly open. Accordingly, the trader's computer must be constantly turned on during trading days, except weekends. Or you need to run a trading terminal on a dedicated server, which not everyone can afford.

  • No reaction to force majeure. Political events, economic changes, and other unpredictable events strongly influence the movement of currency quotes. Such factors are rare, but they lead to noticeable currency changes. Such changes cannot be recognized and considered by robots for signals, because they work according to specified settings. And in such cases, robots can open late and unprofitable transactions. Or, on the contrary, they can miss potentially profitable deals.

  • Automated trading systems are based on technical analysis and do not take into account other factors. The robots catch signals to open trades according to the parameters specified by the developer. They are based on technical analysis tools: oscillators, indicators, quotes history, and price movements. It means that automated trading does not consider the impact of fundamental analysis, economic events and news. Statements by prominent politicians, finance experts, managers of funds and banks, and other market makers can seriously affect currency quotes. But these price formation factors are not used by trading robots.

  • Probability of reaction to false signals. Forex price movements are always unpredictable. The market develops and changes from one trend to another, and it can result in false signals, which can be recognized only by experienced, professional traders. The robot cannot distinguish between false signals and thus opens false, unprofitable transactions.

  • A need for constant updates. You should frequently update your software along with changing market conditions.

  • A human eye is still needed. While the software does most of the job for you, you still need to watch out for computer crashes or connectivity issues.

How to Choose Automated Trading Software

The market is full of numerous software for auto trading, from completely free of charge to unbelievably expensive. We have already mentioned that it is better to stay away from free programs, because they may no longer consider the new trends on the Forex market and are thus inefficient. Here are some selection criteria for traders considering automated programs.

  • The software should fit your needs. Before you choose a program, you should clearly understand your needs and goals as a trader. For example, experienced traders will want an advanced program that generates reports or imposes stops and other specific market orders. At the same time, beginner traders may want a simpler program.

  • The program should be secure and reliable. Professional Forex traders choose software with VPS (Virtual Private Server) hosting. It usually provides higher reliability than a computer at home or in the office. Thus, if you plan to use an adviser to manage your trading, using a VPS can be a good strategy. But be aware that your computer must always be turned on in order to access the server.

  • The automation tool should have transparent pricing, i.e. the customers should clearly understand what's included in the price. Be aware that some companies charge trading commissions. Make sure that the software has a free trial period and a money back guarantees, i.e. you can cancel the license in case the robot proves ineffective.

  • The program should have a high level of technical and service support. This is especially important for beginner traders.

It is also possible to hire a developer or development team to build custom software for you. As a result, you will gain full control over its workflow and get all of the necessary updates in time. However, it may cost you a lot.

Wrapping Up

Automated trading refers to Forex trading by using specialized software, which is also called a trading robot or expert advisor. All you need to do is install the program, enter necessary settings, and have it open orders and conclude deals for you. Auto trading uses various strategies such as double seven, trend RCI, and MACD pivot point.

Auto trading is beneficial for traders in terms of the absence of "human factor", high speed of transactions, round the clock availability, and flexibility. Disadvantages are high costs, malfunctions, no reaction to force majeure, reaction to false signals, and a need for constant updates. When choosing software for automated trading, remember that there is no "one size fits all" solutions. Make sure that the program fits your needs, is secure, has transparent pricing as well as the high-level tech support. If you still cannot find the appropriate software, you can order custom software from a software development agency.

It is up to you to decide if you should trust trading robots or trade on your own. You need to make this decision based on your experience and professional qualities.