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 with 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.

More: » Basic Automated Trading Tips

 

Learning on ForexAutomatic

ForexAutomatic includes a wide variety of learning resources aiming to educate traders on the basics mechanisms behind currency trading.

Forex Money Management

Effective Money Management counts at least 50% of the long-term success of any trader in any financial market. The lack of the right money management system may lead even experienced and very talented traders to great losses, in the long-run.

More: » Automated Forex and Money Management

The Basics of Forex Scalping

Forex Scalping means opening and closing trading positions on a regular basis, aiming to ‘scalp’ profits of 2-10 pips. These positions are opened and closed during tiny segments of time that usually last less than 1 minute. Scalping is the shortest form of day-trading and it becomes more and more popular among Forex Traders many reasons. You may scalp Forex manually or automatically via the use of an Expert Advisor. Scalping requires the existence of state-of-the-art trading technology, tight spreads, plus a perfect understanding of technical analysis and Real Price Action in Forex Trading.

More: » The Basics of Forex Scalping

Introduction to Intermarket Analysis

As world financial markets are getting closer to its other, new Intermarket correlations are emerging. Automated trading is an excellent tool for building strategies that are based on divergences/convergences between correlated markets. Intermarket analysis is a market-driven branch of technical analysis that studies the price relationships between different asset classes.

More: » A Macroeconomic analysis of all major Intermarket correlations of the past 50 years

 

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)

 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 | » Forex Diamond | » All Expert Advisors

 

Automated Trading Strategy

An automated trading strategy incorporates a set of rules and conditions that are capable of creating and entering trading orders without human intervention. Usually, an automated-strategy refers to a software code that is designed to plug into an automated trading platform such as MetaTrader, cTrader, and NinjaTrader. An automated trading strategy contains basically three modules:

• An analysis module that is usually based on technical analysis and market statistics
• A decision-making module that is able to select positions and decide position sizes (Money Management)
• An execution module that is able to enter trading orders, and if needed, to modify or close these orders

There are two main approaches for building an automated-trading strategy:

(A) Model-based strategy building

Model-based strategies are based on a market theory that is attempted to fit in the market data. This type of strategy includes extended experimentation and ‘Trial and Error.’ Model-based strategies can be easily implemented as they don’t require extreme data-analysis. These are some common variables when creating a model of the market:

(B) Data-driven strategy building

Data-driven strategies are based on historical market analysis and data-mining. Based on the available data this type of strategy aims to identify rules and recognize predictive patterns. Data-driven strategies are complex and require significant technical resources for efficient data analysis.

» More on Selecting, Managing, and Backtesting Automated Trading Strategies

 

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 | » 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 | » Rollover SWAP rates

 

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