We live in a world where computers have replaced many things humans used to do. Before automation came into the forex world, traders went through the painstaking process of analyzing candlestick charts.
Of course, a legion of people still trade in this fashion. However, individuals aren’t always as intelligent as they think and can make silly mistakes. Moreover, it is difficult to always be vigilant for new opportunities and execute them quickly.
Well, automation is about replacing humans and doing their job at double the efficiency with no deviation. Here, we uncover this topic in greater detail and offer pointers on choosing the best automated trading forex software.
What is automated forex trading?
Automated forex trading is using a computer program or software to trade the markets. It is the opposite of manual or discretionary trading, where the investor is responsible for executing positions themselves.
We refer to an automatic forex trader as a robot (or bot) or algo (short for algorithmic). In forex, using MetaTrader 4 or MetaTrader 5, we also call these expert advisors or EAs.
Creating a robot with this platform requires knowledge of MetaTrader’s proprietary MQL4 or MQL5 languages, which are similar to C++ and PHP. Below is a picture of the editor used by automated forex traders to create and edit their bots on MT4:
While some may classify copy trading and signals as automated, these systems rely on manual execution from the trader or subscriber.
On the other hand, bots function without your presence by scanning the markets/pairs and executing based on pre-set parameters. Forex trading software can automatically close your positions and open trailing stops where instructed.
The creation of a bot typically starts with an existing manual trading strategy. Alternatively, you are free to edit a current bot. You or a programmer can design the robot to react according to yes/no, true/false, if/else, and various binary mathematical triggers. Let’s look at a simple example.
Suppose you wish to automate a simple 20-day moving average strategy (MA) on EUR/USD. You can program the bot to open a trade once the price is above or below the MA. You could also choose (but not limited to):
- Whether it looks for long (buy), short (sell), or both positions
- Whether it trades any day or only a specific day during the week
- The start and end times when it will work
- How many pips it will trail a stop (or whether it should trail a stop)
- Whether it will use martingale or not
- The maximum spread and slippage it will execute a position
- The maximum number of orders
- The risk per trade based on a percentage of your equity
- The lot or position size
- Take profit and stop loss size
Forex automatic trading allows analysts to robotise their trading system into a plug-and-play solution. When a bot is designed, the programmer thinks about the tools or indicators they will implement.
A critical component of any forex trading automation is backtesting or strategy testing. This refers to using historical data to assess how a robot will perform in the future. You can tweak the bot according to your desired metrics at this stage while ensuring it yields a profit over time. Most important, this testing happens without any real capital at risk.
However, as many traders know too well, past results do not guarantee future outcomes. Backtesting has many limitations. While it can gauge a system’s efficacy, static data doesn’t fully represent reality.
Therefore, the success of forex trading software depends on how it performs in actual market conditions. For this, we have forward testing. Here, the robot is put through its paces to see how it performs on a demo or live account.
Upsides of forex automated trading
So, what are the benefits of using bots in the first place?
It is well-known that human psychology plays a role in a trader’s decision-making. While traders can create plans, following them to the tee isn’t always possible. Even experienced chartists can lack discipline by committing emotional errors like not taking a loss or widening their profit targets.
Unless there is human intervention, automated forex traders do not have this problem. A robot follows pre-defined rules strictly, executing these instructions without uncertainty and deviation.
It helps the trader maintain discipline even during less favourable occasions in the markets. You can plan the trade and trade the plan in the most effective way possible.
Automation and time-saving
Self-directed trading is a technical skill that requires substantial time to look at charts. Software for forex trading performs all the hard work for you. Once the system is up and running, it will work without intervention. This quality allows the trader to focus on other tasks while their robot runs in the background.
A robot can trade far more markets than a human possibly would on their own. You can diversify into several non-forex instruments like stocks, metals, options, commodities, and cryptocurrencies. Also, you can implement multiple unrelated strategies at the same time on one platform.
In forex, we have four trading sessions, with some being more active than others. Traders may have time zone constraints where they cannot be awake at certain periods. For instance, someone living in Tokyo may already be asleep during the New York session, as the time difference between the two is 13 hours.
Forex trading automated software is connected to the markets 24/5, meaning you won’t miss opportunities. Some traders take it further by using a virtual private server (VPS). This offers them their own dedicated network connection, resulting in ultra-fast execution and zero latency.
In manual trading, physical limitations may exist, such as not being near a computer device to analyze a chart or place an order. Robots solve any problems where the trader does not have market access.
Faster and voluminous execution
High-frequency trading is a subset of the forex trading software practiced by institutional investors. Here, a sophisticated computer program places a large volume of orders at ultra-high speeds.
So, having an automated system allows you to execute quickly and with greater volume when an opportunity arises. When you place a trade manually, it takes a few seconds (not to mention the need to include stop losses and take profit orders).
The fast-paced nature of FX means that every second counts in ensuring an optimal entry or taking advantage of an opportunity.
Also, faster execution from a bot makes the process less physically demanding. Automated forex trading software is something to consider if you have a short-term strategy that relies on placing multiple trades in a session.
Downsides of forex automated trading
Despite the immense benefits, forex trading automated software does have notable drawbacks.
Risk of over-optimization
When you automate, it is common for programmers to create a system that looks good on paper but performs horribly in a real market. Although this can happen with manual trading, some traders believe robots should have near-100% win rates.
Over-optimisation or curve fitting is the idea of excessively tweaking a strategy to have impressive returns. When you automate forex trading, it is easy to restart a historical report several times until it produces your desired results. However, these may not happen in a live setting.
Lack of discretion
We have spoken of the benefits of robots being emotionless and methodical in their approach. However, this attribute cannot replicate the human element. The price movements of any financial market happen due to the actions of real people.
There are certain events and conditions that only a human mind. This is what we mean by lack of discretion. For instance, unless programmed, a robot may continue executing even with a potential black swan event.
While these events are rare, it is one example where a manual trader has the flexibility to change their approach and stay away from danger. Yet, a robot doesn’t have the same ability since it only follows instructions without questioning them.
The markets can be an irrational environment that only experienced, self-directed traders may understand. At this point, only artificial intelligence could have near-perfect human discernment (but we are still far from this stage).
Auto forex trading is not always fully autonomous because it does require monitoring. While it is possible to set up this system and walk away, there may be several technical failures along the way.
As with any software, anomalies can exist, like duplicate orders, missing orders, or orders with a larger size than expected. As we discussed, you can only identify these problems with human eyes.
High technical requirements
Unless you delegate the building of software trading forex to a skilled developer, the process requires great technical skill. It is hard to find people that are exceptional traders AND programmers.
While developing a manual strategy is itself a time-consuming endeavour that can take many years, it may not be easy just to automate it to exact specifications.
Also, many traders believe that only some trading systems can be computerized because of the nuances involved.
How to build an automated forex trading system
They say it doesn’t hurt to try. On the developer side, forex auto traders can help develop your programming skills and improve your understanding of price movements. Here are the steps to follow:
Deciding on the strategy
Unless you build on an existing robot, half the development time involves tinkering with a solid manual strategy. This system must have a proven track record and preferably two years of overall profitability.
It should contain clear entry and exit rules, along with how the different indicators interact. Furthermore, you must also know the following:
- The risk-to-reward ratio
- The traded markets (including any non-forex instruments)
- Risk per trade
- The trading days of the strategy
- Whether it implements hedging, grid, or martingale trading
- Whether it uses a fixed stop loss or not
- Position sizing
Choosing the trading platform
Earlier, we mentioned that MT4 and MT5 are the most popular platforms and for a good reason. These charting packages have wide acceptance with brokers worldwide and user-friendly interfaces.
However, there is better and more sophisticated software for forex robot-building like cTrader and NinjaTrader. It ultimately depends on your coding experience. The programming languages on cTrader and NinjaTrader are similar to C#.
This language is generally harder to master than the C++ and PHP-like frameworks you find on MetaTrader. Regardless of the platform, you should be familiar with it to build reliable forex trader software.
Test, test, test
A serious developer will spend at least a year in this phase. Earlier, we spoke of backtesting and forward testing. While the former can give you an idea about performance, it can be pretty inaccurate.
So, the best option is to ‘stress-test’ your forex automated trading program under real-life conditions. Traders can achieve this in two ways. The first is using a demo or practice account that can allow you to test without any monetary risk.
Another approach is funding a small affordable balance on a live cent account. A demo account has advantages but cannot accurately depict spread changes and potential slippage.
The key at this stage is to perfect the robot but not to the point of over-perfection. You should be confident that it will sustain itself even during drawdowns and yield a profit over time.
How to choose forex automated trading software
Only some people have the time, skill, or technical proficiency in creating their own robot from scratch. There continues to be a massive market for knowledgeable and inexperienced traders to seek software for trading forex.
Despite the vast ocean of available robots, it is an unscrupulous industry with very little regulation. It is common to encounter scams where developers use false advertising with overinflated performance figures or sell poorly coded bots.
Therefore, looking at verified and well-rated platforms or third-party sites is essential. Also, it helps to have existing knowledge about automated forex trading and its possibilities.
Here are the things to consider before choosing a robot:
Look at key verified performance statistics
Any forex trading software should talk the talk and walk the walk. This means that it should live up to its performance expectations. You should always look at a robot’s verified live results (instead of demo) from an analytics platform like Myfxbook and FX Blue.
These services offer real-time data on how a bot is performing with no tampering from the trader. This means you get the most accurate picture. Also, you should understand critical metrics like drawdown and profit factor to have a deeper knowledge of the system.
Observe ratings and reviews
While each person’s experience is unique, you should be able to note frequently mentioned concerns, e.g., lack of customer support, inflated performance, and technical glitches. Trustpilot, Forex Peace Army, and Forex Robot Nation are the best review or testimonial resources for forex automated trading.
Consider the purchase cost and minimum account size
Auto forex traders may be considerable investments for some people. Thus, you should compare different products according to their price and features.
Also, some robots may require a specific amount based on their programmed strategy, risk parameters, etc. Ideally, you should choose an automated system with no minimum deposit.
Know the trading style behind the robot
Many forex robots rely on frequent execution or scalping. However, this behaviour may only be preferable for some investors. Some may desire a more long-term approach.
This is why you must understand the strategy behind software for forex trading and match its performance with verified results. This analysis also helps you to align your expectations realistically.
Various research reports suggest that a large chunk of trades from institutional FX investors were done with automated trading. This trend looks set to continue going forward. Yet, as with any computerised system, some forex strategies still work better with self-driven execution.
If you still believe forex automated trading is better, appreciate that it’s not a get-rich-quick scheme. It’s a unique industry subset that takes years to master, even for the most experienced.