WHAT IS AUTOMATED TRADING?
One of the many technologies that has disrupted the global financial markets is automated or algorithmic trading. The increased demand for speedy, reliable, and effective order execution as well as reduced transaction fees is expected to fuel the global growth of automated or algorithmic trading.
Automated trading refers to the use of a computer program or software to create orders and automatically submit them to a market or exchange. Automated trading systems and electronic trading platforms can execute repetitive tasks at speeds with orders of magnitude greater than any human equivalent. For example, many hedge funds make use of “algorithmic trading” which is a fully automated order entry based on a computer trading model. It is also worth noting that more than 75% of the stock shares traded on NYSE and NASDAQ originate from automated trading system orders.
These systems can be designed to trade forex, stocks, options and futures based on a predefined set of rules which determine when to enter an order, when to exit a position and how much money to invest in each trading product. Trading strategies vary, with some being designed to pick market tops and bottoms while others follow a trend or involve some complex random approaches. When a predetermined signal emerges, the software actually places a trade automatically.
AUTO-TRADING FOR RETAIL FOREX TRADERS
Would it not be wonderful if all your forex trades were based on expert advice from someone who could analyse all the charts, trends, news and tell you what would be the most profitable action? The MetaTrader 4 platform contains programs that allow for the automation of trading and analytic processes, called Expert Advisors (EAs).
An EA is an automated trading system, which automatically opens and closes trades based on pre-set or programmed rules. A number of professional traders have found EAs to be of benefit. EAs are programmed to work in multiple ways. For example, by utilising a selection of technical indicators, such as the moving average indicator, or the MACD – moving average convergence/divergence indicator and searching for necessary trends and breakouts, EAs can analyse the market, as well as the behaviour of individual financial instruments and can generate a signal about trading opportunities.
What is the difference between an Expert Advisor (EAs) and Forex Robots?
EAs are programmed to automatically generate trading signals and notify you of trading opportunities. However, another type of automated trading system is a Forex Robot which, like an EA is a program that can identify market patterns and generate trading signals. However, unlike an EA, a Forex Robot can automatically trade on your behalf. An EA, on the other hand, will always require a trader to manually authorise a trade.
When using strict definitions, the difference between an EA and a Forex Robot is that an EA will generate signals while a Forex Robot will perform trades without any manual sign-off required. However, the terms are often used interchangeable, which means that many so-called Expert Advisors are capable of far more than just generating signals.
As with any automated software, EAs and Forex Robots reduce the chance of making emotional and irrational trading decisions, which commonly affects novices or inexperienced Forex Traders. EAs and Forex Robots follow a very strict and consecutive plan, free from any human intervention.
The most popular robots are built around the MetaTrader platform. These robots can do anything from giving you a signal to place a trade, to placing and managing the trade for you automatically. Expert Advisors or Forex Robots are very useful when one has a forex strategy that is strictly mechanical and does not require a human in the decision-making process.
HOW DOES IT WORK?
Expert Advisors can be obtained online, usually for a price, and can be quickly installed into your trading platform without any special technical knowledge. The two ways that retail traders can make use of auto-trading or robots include (i) purchasing or renting a forex trading robot or (ii) developing or coding a trading software.
- Purchasing or Renting an EA or Forex Trading Robot
EAs and Forex Robots are available for traders to purchase over the internet. There are many companies that create and sell EAs and Forex Robots. For example, the MetaTrader 4 platform enables traders to make on-line purchases of the trading software. However, it is advised to be careful when purchasing robots on-line.
An approach that could work would be to do some research before purchasing the software. The following are some of the different types of EAs available;
TYPES OF EXPERT ADVISORS
The News Expert Advisor
As the name implies, the main purpose is to take advantage of various news events or fundamental announcements and big price moves that can take place during big news releases.
The Breakout Expert Advisor
This is specially designed to open a trade when a price breaks through preliminarily determined resistance and support levels.
The Hedge Expert Advisor
This EA plays two respective and opposing positions, diminishing the loss on one whilst facilitating profit on another.
Expert Advisor Scalper
Such EAs pursue the goal to secure small profits once they are available. The EA will open and close an endless amount of trades for any profit, so your EA could trade up to 400-500 times a day depending on market conditions.
Sample of EAs or Forex Robots
Source: MetaTrader Platform
2. Coding your own Trading Software
An alternative approach would be to develop your own strategy and coding it. Trading generally involves finding risk-adjusted trades with an appropriate trade size, managing the opening trade well, and closing the trade at an appropriate time. Therefore, any non-discretionary technical trading strategy that has clear – cut, unambiguous rules is a good candidate for auto-trading.
The coding process is generally accomplished using an Application Programming Interface (API), which connects the trader’s system to the trade execution structure. Once all of the trading rules and criteria are determined by the trader, programming an API can be relatively straightforward for anyone with programming experience. After the specific trading rules and criteria are determined, the strategy is back-tested with positive results, and the API is programmed.
Auto-trading is almost as simple as flipping a switch or pressing a button to begin the trading process. Enabling Auto Trading on MT4 instantly activates the Expert Advisor.
Source: MetaTrader Platform
WEIGHING THE PROS & CONS OF ROBOT TRADING
Advantages of Robot Trading
- Automated trading minimises emotions in the trading process. By keeping emotions in check, traders typically have an easier time sticking to the plan. Human emotions sometimes tend to cloud decision-making and can lead a trader to deviate from a set strategy. Robots do not have any emotional components and are wired to stick to system commands.
- Robot trading preserves discipline. The fact that the trade rules are established and trade execution is performed automatically means that discipline is preserved even in volatile markets. Discipline is often lost due to emotional factors such as fear of taking a loss.
- A robot is not prone to human error. Being human also entails making mistakes. This can be in the form of making wrong calculations in position-sizing or entering an extra zero in the trade lot size. Such errors can be avoided when using a Forex Robot.
- Robots are consistent. One of the biggest challenges in trading is to plan the trade and trade the plan. Automated trading systems allow traders to achieve consistency by trading the plan.
- Improved order entry speed. Since computers respond immediately to changing market conditions, automated systems are able to generate orders as soon as trade criteria are met. Getting in or out of a trade a few seconds earlier can make a big difference in the trade’s outcome.
Disadvantages of Robot Trading
- Mechanical Failures. The theory behind automated trading makes it seem simple. In reality, however, automated trading is a sophisticated method of trading. Depending on the trading platform, a trade order could reside on a computer – and not a server. What that means is that if an internet connection is lost, an order might not be sent to the market. There could also be a discrepancy between the “theoretical trades” generated by the strategy and the order entry platform component that turns them into real trades.
- Automated trading systems require monitoring. This is due to the potential for mechanical failures, such as connectivity issues, power losses or computer crashes. It is possible for an automated trading system to experience anomalies that could result in errant orders, missing orders, or duplicate orders.
- Lack of Creativity. Robots only follow structures. Most Robots use a set of instructions to trade. For instance, they are set to sell if the price dropped to a fixed rate and buy at a particular point.
- There is need for thorough research when identifying the best EAs or Robots. Before settling on one there is need to make sure that it is certified and legitimate
- Robots react quickly to market movements. While humans take a few seconds or longer to digest market information and figure out how to react to price movements, a Forex Robot can react instantly and execute a trade faster than a blink of an eye. Expert Advisors can also book profits or cut losses without second-guessing.
- Diversify Trading. Automated trading systems permit the user to trade multiple accounts or various strategies at one time. This has the potential to spread risk over various instruments while creating a hedge against losing positions.
- An EA does not sleep. This means that it can work 24/7. Forex is one market that is open 24 hours a day. The problem is that most of us humans do need our sleep. This is where the EA can help, tracking price actions, market movements and any other parameters you might have determined across the different time zones, so that your time is freed up. The program will track technical indicators and make trades on your behalf, based on pre-set rules.
- Robots are newbie-friendly. Trading Robots contain straightforward ways to get started and even start making money in the same instance. The basic knowledge of reading the graphs and analysis is required, but other than that, beginners learn as they go.
Whether you decide to apply your own expertise, purchase, rent or code a Forex Robot, the bottom line is that ROBOTS DO NOT SLEEP. One of the characteristics of the FX market is that it is open 24 hours a day. However, humans cannot possibly stay up all day and night throughout the trading week just to keep track of price action. A Forex Robot can be programmed to watch market movements without the need to rest or even take breaks. The Robot simply follows a set of rules based on technical indicators or price action and can execute trades automatically.
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