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Everything You Need To Know About Automated Trading

Reading time: 20 minutes

Wouldn't it be great to have a robot trade on your behalf and earn guaranteed profits? It's a dream of many to find the perfect computerised trading system for automated trading that guarantees profits, and requires little input from the trader themselves. Whilst there are many automated trading systems available, there are a few burning questions which need to be answered.

Exactly what is an automated trading system? What is automated trading in Forex? Is it possible to find a profitable system? What are the advantages and disadvantages of automated trading? Are auto systems safe? This article will answer these questions and much more!

What is an Automated Trading System?

An automated trading system is a program that allows traders to set rules for entering and exiting trades. Forex traders and investors can turn exact entry, exit, and money management rules into automated Forex trading systems that enable computers to perform and monitor trades. Once those rules are programmed, their computer can automatically carry out trades according to those rules.

Trade entry and exit rules can be based on simple conditions, like a Moving Average (MA) crossover, or they can be based on sophisticated strategies that demand a comprehensive understanding of the programming language that is specific to the user's trading platform.

Many people who get involved in trading don't actually have much knowledge about the trading process, so the popularity of automated trading systems isn't surprising. They are also extremely accessible, as all that's needed is a computer with an internet connection - you don't even need a big investment to get started.

What are EAs and Forex robots?

Automated Forex trading systems are usually grouped into two categories - Expert Advisors, or EAs, and Forex robots.

EAs are created by highly skilled and experienced professionals who write algorithms to analyse market trends and to perform the trading process. They are chosen based on their level of knowledge and accomplishments, to avoid panic or anxiety on the part of client traders.

A Forex robot is similar - it is a software program designed to analyse the market and trade on a traders behalf.

The difference between the two is that EAs don't actively make trades, while Forex robots do. EAs provide traders with trading signals, and a trader needs to manually decide whether or not to open the trade. Forex robots, on the other hand, can take care of the entire trading process automatically.

How Does Automated Trading Work in Forex?

Whether you are a beginner or an experienced trader, you can use automated currency trading systems to make real trading decisions on your behalf.

The best automated Forex trading systems are computer programs that have been designed to analyse market activity and currency price charts. The software helps by identifying key trading signals, including all sorts of spread discrepancies, price instability patterns, news that might affect transactions, and fluctuations in currencies, all while performing your trading activities, and to keep any losses to an absolute minimum.

The system will also locate the profitable currency pairs, and doing all of this before placing trades on them. If the software program can be set with user defined criteria (which satisfies all predetermined parameters) it can help in broadcasting a sell or buy alert, and can automatically perform the trading. This can also help in making transactions profitable.

Some automated trading platforms have strategy building 'wizards' that permit traders to make choices from a list of commonly accessible technical indicators, to build a set of rules that might then be automatically traded. For example, the trader could establish that a long trade will be entered as soon as the 50-day MA crosses above the 200-day MA, on a 5-minute chart of a specific trading instrument.

Users can also input the type of order (e.g market or limit) and precisely when the trade will be triggered (e.g at the open of the next bar or at the close of the bar), or they can exploit the platform's default inputs. However, a lot of traders decide to program their own trading strategies and custom indicators, or they work closely with a programmer to design their automated trading system. Whilst this often requires more effort compared with using the platform's wizard, it permits a much greater degree of flexibility, and the results can be considerably more rewarding.

If you are planning to program your own trading strategy, however, keep in mind that most automated trading systems require the application of software that is linked to a direct access broker, and any particular rules need to be written in that platform's proprietary language. For instance, the most popular trading platforms: MetaTrader 4 and MetaTrader 5 use the MQL programming language, whilest the NinjaTrader platform uses the NinjaScript programming language.

As soon as the rules have been set, the computer can then monitor the markets in order to locate buy or sell opportunities based on the trading strategy, and it can then carry out auto trading. Once a trade is entered - depending on the specified rules - orders for protective stop losses, trailing stops, and also profit targets will be entered. Moreover, in fast-moving markets this immediate order entry can mean the distinction between a small loss, and a disastrous loss, in the event that a trade moves against the trader.

Can Forex robots and EAs lose?

While automated Forex systems can be a valuable tool, what must be remembered is that the majority of robots trade within a certain range. They make a particular amount of pips inside the tight range, during the slowest time on the Forex market, and they regularly set a few pip targets, and may not even use a stop-loss. They can be classed as successful, as they do tend to make profits in each trade, even if it is only a few.

When an unanticipated and strong range breakout occurs, it wipes out the small profits that they have made. Some robots which are promoted as the best Forex trading robots, can gain a profit in a positive trend, although they may lose money in a choppy FX market, so the discovery of a great trend to follow is an essential task.

However, where there is a risk of failure, a warning message is displayed, seeking approval before any transaction is made. The major advantage of a Forex auto trading system is that it is unemotional and consistent in its decisions.


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The Pros of Automated Trading and Automated Systems

Forex trading is considered as one of the premiere markets to trade, and an automated Forex trading system can help by instantly executing all Forex transactions. With the help of this software, the trader will only have to switch on the computer and let the software take care of placing trades.

So what are the benefits of these systems? Keep reading to find out.

1. Automated Forex systems are accessible

Forex automated trading systems can be used by beginners, veterans, and professionals who may find them helpful in making decisions related to trading. The software is available in different price ranges, and offers varying levels of sophistication. They also come with free demonstration models, so that users can familiarise themselves with the program before using it on their live trading account.

2. Automated systems eliminate the emotions of trading

One of the biggest attractions of strategy automation is that it can eliminate any negative or destructive emotions involved with trading, since trades are automatically placed as soon as certain criteria are met. In other words, your chosen trading software or Forex robot executes all trading processes, and opens and closes trades, while you sit back and relax.

By keeping emotions at bay, traders generally have an easier time sticking to their primary plan. As trade orders are automatically executed as soon as the trade rules have been met, traders will not have the chance to hesitate or question the trade. Additionally, automated trading can prevent overtrading (i.e. purchasing and selling at every perceived opportunity).

3. Automated systems allow you to backtest

The next advantage is the ability to backtest. Backtesting applies trading rules to historical market data in order to define the viability of the idea. When developing a system for automated trading, all rules have to be absolute, with no space for interpretation (i.e. a computer must do precisely what needs to be done without guessing).

In addition, traders can use these rules and test them on historical data prior to risking money in live trading sessions. Careful backtesting permits traders to evaluate and fine-tune a trading idea, as well as to identify the system's expectancy - the average amount that an trader can anticipate to win (or even lose) per unit of risk.

4. Auto trading preserves discipline

Auto trading also preserves discipline. As trade rules are set and trade execution is carried out automatically, discipline is preserved even in volatile markets. Discipline is frequently lost due to emotional factors such as the fear of taking a loss, or the desire to gain a little more profit from a trade. Automated trading helps to make sure that discipline is retained, because the trading plan will be followed precisely. Additionally, pilot-error is diminished, for example, an order to purchase 100 lots will not be incorrectly entered as an order to sell 1,000 lots accordingly.

5. EAs and auto trading help with consistency

It would be a mistake not to mention that automated trading helps to achieve consistency. One of the biggest challenges in trading is to planning the next move. Even if a trading plan has the potential to be profitable enough, traders who ignore the rules alter any expectancy that the system would have actually had.

You should understand that there is no such thing as a trading plan that wins 100% of the time - losses are always a part of the game. However, losses can be psychologically harmful, so a trader who has two or three losing trades in a row may decide to skip the next trade. The next trade could have been a winner, so the trader has already ruined any expectancy the system had. Thus, automated systems enable traders to achieve consistency.

6. Automation improves order entry speed

Another benefit is improved order entry speed. As computers respond instantaneously to changing market conditions, automated systems are capable of generating orders once trade criteria are met. As a consequence, getting in or out of a trade a few seconds earlier can make a big difference in the trade's outcome. Once a position is entered, all other orders are automatically created, including protective stop-losses and also profit targets.

You know that markets can move quickly, and it is demoralising to have a trade reach the profit target or to blow past a stop-loss level prior to the orders being entered.

7. Automated systems help diversify trading

Finally, the last advantage is that you can diversify trading. An automated trading platform allows the user to trade with multiple accounts, or different strategies simultaneously. In turn, this has the potential to spread risk over various instruments, while generating a hedge against losing positions. The software is able to scan for trading opportunities across a range of markets, to create orders, and is also able to monitor trades.

The Cons of Automated Trading and Automated Systems

Despite the advantages, you should know that automated trading is not deprived of certain disadvantages. The theory behind auto trading makes it seem rather simple: setup the software, program the rules, and watch it trade. However, the reality does not always reflect the anticipation. Automated trading is not infallible.

1. Automated systems rely on technology

Depending on the trading platform, a trade order could actually reside on a computer, and not a server. This implies that if your internet connection is lost, an order might not be sent to the market. There could also be a discrepancy between the so called hypothetical trades generated by the strategy, and the order entry platform component that turns them into real trades. The majority of traders should expect a learning curve while using automated trading systems, and it is a good idea to start with small trade sizes while the process is being refined.

2. Automated systems need to be monitored

The second con is monitoring. Though it would be magnificent to turn the computer on and leave for the day, automated trading systems require monitoring. This is due to the potential for mechanical failures, such as connectivity issues, computer crashes or power losses, and system quirks. It is possible for an auto trade system to experience anomalies that could result in missing orders, errant orders, or even duplicate orders. If the system is monitored, those events can be determined and resolved swiftly.

3. Systems can be over-optimised

And the last most apparent drawback is over-optimisation. Although not specific to auto trading systems, traders who employ backtesting techniques can produce systems that look great on paper, and perform terribly in a live market. Thereby, over-optimisation refers to excessive curve-fitting, which generates a trading plan that is unreliable in live trading.

For instance, it is possible to tweak a strategy to reach exceptional results based on the historical data on which it was tested. Trades occasionally incorrectly presume that a trading plan should have close to 100% profitable trades, or should never experience a drawdown in order to be a 'feasible plan'. As such, established parameters can be adjusted to create a 'near ideal' plan, however, these will usually fail once applied to a live market.

Top 5 Questions About Automated Trading Systems

1. Is a Forex Automated Trading System Profitable?

Forex auto trading systems do not guarantee 100% profits, but they do make sure that you will benefit the most from market movements, whatever they may be. Auto Forex trading systems work in a very articulate and coherent way. Expert advisors are basically programs that comprise of the certain modules that investigate charts and figures, which move between a trader and a Forex broker.

These specially designed programs are extremely easy to handle and work with, so you don't need any prior training in order to handle them. You just need to download the program, install it, and then adjust the settings on your computer. The automated currency trading system will then start working, and will start generating immediate results.

2. Are Forex Robots Effective?

Though FX robots promise to make beneficial trades, not all of them are what traders expect them to be.

Although they can scan millions of different charts within seconds, most often 90% will turn out incorrect information. This is understandable - because FX robots are just robots. Even though they are capable of performing highly sophisticated tasks, and many at once, every Forex robot or Forex robot free is still deprived of creative thinking. They cannot imagine what may take place in the near future, as their functionality is restricted to how they were initially programmed, as well as past performance.

For traders who use robots, they should not fully depend on it to conduct all of their trading activity. Ultimately, trading demands a considerable amount of human research and observation. Additionally, humans, and not trading software, can actually follow up with diverse economic conditions, and keep up with the news in the financial world. Forex robots, which are thought to be Forex robots that work, can solely find positive trends as well as trading signals, but occasionally their functionality is unfavourably affected by either jittery trends or false information.

Successful FX trading is based on knowledge, proficiency and skill. It involves analytical thinking, and something visual. When looking at what are Forex robots, it is clear that they cannot properly work in this manner. Market conditions tend to change all the time, and only an experienced Forex trader can distinguish between when to enter the market, or when to stay away.

3. What is the Best Automated Forex System?

Many automated Forex systems are offered for free, with extremely tempting service guarantees. However, these programs aren't faultless. The disadvantage is that many of these systems are associated with scams. Nonetheless, the best automated Forex trading system can be safely attained if the privacy parameters programmed into the system are correctly set and checked.

It is hard to say what the best EA is, as in most cases, profitable EAs are difficult to access. There are many robots that used to be profitable. However, they are no longer relevant to current market conditions. For the most part, the best automated system to use is the one that you use for manual trading. Have it coded in MQL, this way you can substitute your own efforts with the script.

4. How Can You Get an Efficient EA?

As mentioned earlier, the best EA is the system that would do exactly what you would do, but automatically. This way you can save yourself a lot of time, and you would simply focus on the development of your trading strategy, without actually having to execute it. This is certainly a great time saver for most Forex traders.

If you are trading on a MT4 trading platform, you would need to compose your own trading robot using MQL programming language. It may be the case that you are a good trader, but have little or no programming knowledge. This isn't a problem - there are plenty of superb, reputable MQL programmers available who will code your trading strategy and create an EA for you at a reasonable cost.

5. Are Automated Trading Systems a Scam?

The idea of having a program trade the market for you can sound too good to be true, which can lead many to wonder if it's all a scam. In fact, some federal governments consider automated trading systems to be scams. In a similar way, you are not likely to find any article in Forbes, the Wall Street Journal, or any other respectable news source that promotes them.

What's more, even online robot merchants try to move their robots in rank by claiming that their opponents' ones are scams. A lot are advertised with false claims by people who have made serious money applying these systems. The truth however, is that a great number of investors and traders have lost a lot of money using so called 'free' Forex robots that work. There have even been circumstances in which whole accounts have been wiped out.

The biggest disadvantage of automated trading systems in the Forex market is that there are a lot of scams. The more you search for a perfect system, the higher the chance of seeing pages that promote EAs with 100% daily returns is. These pages display MetaTrader history showing how profitable the advisor is - and they usually come at a price. You can buy some software for as little as 25 USD, while some software can cost as much as 1,000 USD. Some websites will guarantee high profits, and may even offer money back guarantees. However, the vast majority of these types of EAs are unfortunately scams.

Think for yourself for a moment. Would you sell a highly profitable trading system if you could make profit with it on a managed account? Probably not. Would an efficient automated system be priced as low as 25 USD? Again, this is extremely unlikely.

Auto trading developers can potentially become millionaires. Smart designers are aware that people yearn to make a lot of money, and try to ensure that robot Forex trading appears to be one of the finest ways that they can achieve this. Nonetheless, they exploit this as a possibility to design a robot, or any other software (or even a DVD, webinar, seminar, e-book etc) to sell and prosper.

If the robots they sell could actually make a huge amount of money through trading the currencies, then what is the point in selling them to others and not utilising them on their own Forex accounts? The answer is logical - robots can barely make money for a Forex trader. Can a $99 FX robot or a free Forex robot really make hundreds or thousands of dollars every month? If it could, you have to ask yourself - would it really be sold for such a relatively low price?

It is important to be able to identify EA scams and not fall for them. Generally speaking, it is sensible to avoid anything that you have to pay for. You will not only lose the money on the software purchase, but if you are using the advisor on a live account, you could also lose your trading balance,

Conclusion

After reading this article, we hope you can now answer the following questions - what is automated trading? And what is automated Forex trading? Though automated trading may seem appealing for a variety of reasons, such systems should not be considered as a substitute for carefully executed trading.

Mechanical failures can and do occur - and systems require continual monitoring. Server-based platforms might provide a solution for traders who want to diminish the risks of mechanical failures. It is recommended by many professional traders to use a hybrid approach, consisting of manual and auto trading to achieve the best results.

If you would like to learn more about automated trading, why not read the following articles concerning automated trading in Forex?

Forex Automated Trading Signals

How Does a Forex Expert Advisor Work?

How to Choose a Forex Automated Trading Strategy

What Are Forex Robots and Do They Really Work?


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