What is Automated Trading?
Automated forex trading, also called algorithmic trading, is the process of using computer programs or software to execute trades in the financial markets. These systems are designed to analyze market data technically and make trades based on predetermined rules and algorithms.
In automated trading, a trader is not required to intervene manually to initiate or exit a trade. The rules are written in the proprietary language of the program and the software places order on the basis of those guidelines.
Forex automation can include the use of expert advisors (EAs), also known as forex trading robots, as well as the use of more advanced AI-based systems. These systems should be integrated with a brokerage platform so that the buy and sell orders placed with a trading bot can be executed in the real market. Check out the best copy trading crypto here.
How Does Automated Trading Work?
The automated trading software or a robot runs on a program that identifies the buy and sell signals which are generated based on the criteria set by the trader.
The process typically starts with the creation of a trading strategy as it is the strategy that governs the rules for trade execution. These rules can include things like entry and exit points, stop-loss and take-profit levels, and money management techniques. Instead of creating a strategy, you can also buy a readymade autotrading forex system as there are plenty of them available on the internet. However, it’s crucial to exercise caution and understand the underlying strategy of the system to assess the effectiveness of an expert advisor.
Once the system is set up, it will continuously monitor the market and execute trades automatically based on the rules that have been programmed. The system can also be configured to adapt to changing market conditions and make adjustments to the trading strategy as needed.Read More
Advantages of Automated Forex Trading
- Better speed and efficiency: One of the key advantages of automated forex trading is that it can operate at a much faster rate as compared to manual trading. The reason is that the system can analyze market data and execute trades in a fraction of time which can be especially beneficial in fast-paced markets where traders are required to make decisions quickly.
- No emotional involvement: Another valued advantage of automated trading is that it eliminates the emotional influence on trading decisions. It’s a fact that overly emotional traders tend to make irrational decisions as they have a hard time sticking to their trading plan. However, since the trades in automated forex trading are executed automatically, it leaves no room for automated traders to be emotional which saves them from making impulsive decisions as well as remove the hesitation of “pulling the trigger”
- Improved Consistency: Once the strategy is in place, the automated system will continuously monitor the market and execute trades automatically based on pre- established rules. This ensures that trades are executed consistently and in line with the strategy. This is also helpful in preserving trading discipline. Generally, the biggest challenge for traders is to stick to their trading plan. Even if the trade has the potential to be profitable, traders often mess up by entering too early or exiting too late but the auto trading system follows the plan as if it’s a rule written in stone ensuring that the timings for entry and exit are in accordance with the rules that you’ve set.
- Backtesting: Automated forex trading systems can be fine-tuned and optimized for profitability by using historical market data to test their performance. This is done through backtesting, which involves using past market data to simulate how the system would have performed in real-world trading scenarios. This allows traders to identify any shortcomings in the system and make alterations to improve its profitability before implementing it in the live market.
- Scalability: Automated systems can be easily scaled to handle large volumes of trades and manage multiple positions simultaneously. It can scan the market for all the potential positions at a given time. Therefore, traders can diversify and spread the risk across multiple instruments.
Disadvantages of Automated Forex Trading
Automated trading systems, while providing many benefits, also come with their own set of disadvantages:
- Chances of an automated system to perform poorly: If the system is not properly configured, or if the rules that govern the trading strategy are not sound, the system may end up executing trades that result in losses.
- Technical Glitches: Automated trading systems can also be subject to mechanical failures or technical errors, which can lead to unexpected losses. As such, it’s important to have proper risk management techniques in place when using automated trading systems.
- Over-reliance: Traders may become too reliant on their automated systems, which can lead to a lack of understanding of the market and the underlying trading strategies.
How to Start Automated Trading?
- The first step is to choose a suitable automated trade platform that offers the option to build an automated trading system.
- Then you need to develop a trading strategy that your EA or the automated system will follow. This can be based on technical indicators, such as moving averages, relative strength index, and fibonacci retracements, or on other methods like price action trading.
- Once the trading strategy is in place, the next step is to establish a set of rules that will preside over the execution of trades. These rules will signal the system as to when and what type of order to execute, where to place the limits etc.
- After the rules have been set, the automated system can be programmed to follow them. This can be done using a programming language such as MQL4 or MQL5 or other proprietary language that the auto trading platform you are using supports.
- After the system is programmed, it should be backtested and forward tested to determine its potential profitability before being implemented in live trading. Moreover, once the system is up and running, it should be continuously monitored for performance and any glitches. Regularly check the system’s performance, adjust the rules and strategy as needed, and ensure that the system is aligned with the market conditions.
Do I need programming skills to use automated trading systems?
It depends on the type of automated trading system you use. Some systems may require programming skills to create and customize the trading rules. But pre-built EAs or copy-trading platforms do not require programming skills.
Are automated trading systems profitable?
The profitability of an automated trading system depends on the trading strategy and the performance of the system. Backtesting the system can provide an indication of its potential profitability.