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Selecting Forex Automated Strategy

How To Select The Best Forex Automated Trading Strategy

Choosing automated Forex trading strategies may sound easy, since automated trading is often a way for beginners to get started in the Forex market. It allows those without background or knowledge in trading to invest, while taking out the disruptive factor of human psychology. Automated trading will carry out trades for the user on a much more frequent scale and without impulsive, non-strategic moves.

However, automated trading is far more effective if the human trader is advanced. S/he can then adjust the algorithms to suit his analysis of the market, and eventually devise a more accurate algorithm of his own. It is important to know how to use automated trading before you begin, so that you can select the best automated Forex trading strategies.

The four key items in your selection

There are four key items you need to take into account when making your selection: description, entry-exit signals, application and leverage. Knowing what you are looking for and choosing these items carefully, will let you make the most of automated trading. As with any type of trades, nothing is 100% guaranteed, but following this checklist will increase your chances of success.

Description

It sounds obvious, but you should never choose a strategy before finding out exactly what each aspect of it means, and the logic behind it. Always take the following factors in the description into account:

  • profit target
  • risk and stop loss
  • momentum
  • range
  • trend
  • breakout

The description should include the type of market conditions that the strategy was created for. While a strategy may work great in one environment, it may be ineffective in others.

Entry and exit signals

The entry and exit signals in an automated Forex strategy should be seen in the broader context of a collection of trades, rather than on an individual basis. It’s the logic that is important here - determine if the logic makes firm sense and will work in the present environment. When adapting your strategy, do the following:

  • place your winning and losing trades in separate baskets. Work out what the average winner or average loser is, and seek out strategies with higher average winners than losers.
  • review the trade performance in baskets of at least 10 trades. Review whether the net result added pips to your account. Seek strategies that add pips in a basket of X amount of trades.

Application

Application involves assessing the market conditions, and the result those conditions will have on your trades. There are two different kinds of market conditions that have several variations. We can define these conditions as trending and non-trending markets.

Trending markets: prices are steadily progressing in one direction or the other. You will see an uptrend and a whole amount of higher highs or higher lows, or a downtrend series of lower highs and lower lows.

Non-trending markets: the trades are not progressing, but rather moving sideways.

Leverage

Traders tend to expect too much from good automated trading strategies before utilising them, which can cause them to apply too much financial leverage. This occurs when traders only look at the positives of a strategy and ignore the potential losses. If you want to ensure minimum losses, then you should be careful in how much leverage you apply.

10 times effective leverage is as high as you should go. If you are starting out, you may consider using less leverage at five times or even smaller. The benefit of exploiting smaller amounts of leverage is that if your FX strategy experiences drawdown, you are just risking a small portion of your account and consequently you will have much more capital left to trade with.

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