Get Started with Automated Forex Trading

Introduction to Automated Forex Trading

Automated trading or algorithmic trading refers to the combination of hardware and software in order to create computer systems capable of autonomously generating trading orders and automatically submit them to the market without any human intervention. Automated trading systems can automate the whole trading process, from the trading decision to market execution. The enormous multi-tasking power of these systems allows the simultaneous analysis of hundreds of financial markets. Moreover, an automated system has no emotions and can trade 24/7 without feeling stress or fatigue. All these advantages make the creation of a successful automated trading system the ‘holy grail’ for any ambitious trader.

» Read more about the basics of Automated Trading

 

Types of Automated Forex Trading Systems

According to Mitra, di Bartolomeo, and Banerjee (2011), automated trading can be divided into five (5) main categories:

General Categories of Automated Trading

(i) Algorithmic Executions (our focus)

(ii) Statistical Arbitrage

(iii) Crossing Transactions

(iv) Electronic Liquidity Provision

(v) Predatory Trading

Semi-Automated vs Fully-Automated Systems

We may distinguish automated trading into semi-automatic and fully-automatic trading systems. A semi-automatic system is able to execute automated orders while it is continuously re-adjusted by a human programmer/analyst. This is happening in order for the system to fit the special conditions of any given market. For example, in a day when the market is ranging with low volatility and limited liquidity, the controller reduces the risk ratio and the system becomes more risk-averse selecting only high-probable trades. On the other hand, a fully-automated system excludes any human intervention, in this category, we can find Expert Advisors.

More: » Compare Semi-Automated Trade Systems | » Compare Fully-Automated Expert Advisors

 

The Advantages/Disadvantages of Automated Trading

The great advantage of an automated trading system is that it is able to exclude human psychology out of the game. The emotional character of our human nature is highly disturbing our decision-making process when we trade in any financial market. Fear, hyper-optimism and other similar feelings deriving from our emotional brain are working against logic and finally against the odds of winning. Our emotional brain is the worst trader there is. Furthermore, the classic type of trading has limitations regarding the stamina of our human nature. Automated Trading never gets tired. Using a VPS hosting service you can even close your PC and continue to trade 24hours per day.

The great disadvantage of any automated trading system is that it can deal only the market conditions that it is programmed to deal with. That means that new market conditions deriving from major fundamental changes cannot be interpreted and incorporated by a fully-automated system. A major event, for example, a country’s default to meet its payments, usually leads to extreme volatility in the market, and extreme volatility can change everything. Semi-automatic systems may adapt better to new market conditions, as they can be highly re-adjusted by human intervention or even be stopped.

Educational Resources: » Money Management | » Forex Scalping | » Trading Tips

 

Expert Advisors (EAs)

A Forex Robot or else an Expert Advisor is a tiny piece of software that suits in your Trading Platform and trades automatically on your behalf. Forex Robots are incorporating algorithms to measure and to evaluate intraday, daily, or long term price trends. These systems are able to manage any trading operation by sending and executing trades directly to your broker’s server. Money management and a stop-loss order are also included in their core algorithms so that they can limit the loss potential. Forex robots can trade 24-hours per day using a computer that is continuously turned-on or using a VPS Forex hosting (recommended).

Experts Advisor are programmed according to the trading platform that they will be used. For example, if the platform is the popular MT4 then the language is MQL4 (MetaQuotes) and if the platform is MetaTrader5 then the language is MQL5.

Creating Custom Expert Advisors (EAs)

Nowadays, any trader can build an advanced Expert Advisor (EA) without programming skills. Expert Advisors are able to trade any financial asset class (Forex, Crypto, Equities, Bonds, ETFs, and Commodities).

More: ► Full Tutorial on how to create Custom Expert Advisors

 Scalping and the Role of Technology

Technology matters especially as concerns short-term trading and Forex Scalping. Scalping is a trading strategy targeting profits of 4-10 pips while tens of trades may be executed in a few minutes. These types of scalping strategies are usually incurred in Forex Robots. If you trade from your own PC keep in mind that the speed of execution is absolutely crucial when you use automated Forex systems.

Review EAs: » Wallstreet Forex | » Volatility Factor | » Forex Diamond | » All Expert Advisors

 

Manual Trading Systems

A Trading System is a trading method that is based on a set of specific rules and conditions to determine whether to buy or sell a financial asset at a specific price and time. Trading systems are usually based on a series of technical analysis tools and conditions for entering or closing trade positions. Other trading systems, may be based on fundamental analysis and trade the news, or even trade the inefficiencies between different financial markets (arbitrage trade systems).

Key Components of a Proper Trading System

(1) Trend identification and confirmation (in at least 2 timeframes)

(2) Complete order creation (enter-price, take profit, stop-loss)

(3) Money-management sub-system (additional rules)

Review Trading Systems: » EA Builder | » Forex Trendy | » Forex Mystery | » All Reviews

 

Automated Trading Platforms

A trading platform is a software application that enables traders to open, close, and alter positions through a financial broker. A trading platform can be either a web-based application or software installed on desktop/mobile devices. Most trading platforms are free software, but in some cases, platform providers or brokers may charge a fee.

Review Platforms: » StrategyQuant | » MetaTrader4 | » MetaTrader5 | » Review All Platforms

 

Choosing the Right Forex Broker

If you decide to implement a short-term automated trading strategy {for example an intraday scalping strategy} you should choose a Forex broker very carefully. Some Forex brokers even forbid scalping, so be extra careful with that. Let’s see some factors determining the ideal Forex Broker for short-term trading:

1. Tight Spreads

Tight spreads are absolutely crucial in order to trade Forex in the short-term. When your target profit of 4-6 pips, the difference between a 0.5 pip and a 2.5 spreads pips is really huge.

2. Fast Execution

High execution delays can catastrophically disturb short-term trading. That is why you should be after only No-Dealing Desk Brokers. An NDD broker is either an ECN or an STP broker.

3. Latency of Servers

When the servers of a Forex broker are situated in the same data center as its liquidity provider, then execution delays are minimized and traders get the best fills. Professional arbitrage systems give extra weight in such details.

4. Safety of Money

Last but not least, is the safety of money. The key issues here are the headquarters base, regulation, years in the market, and segregation of client's funds.

Compare: » Compare ECN/STP Forex Brokers

 

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