How to Make Automated Forex Trading Work for You

What Is Automated Forex Trading

Auto Forex trading is a system of trading foreign currencies based on automated forex trading programs using a set of rules that determine whether to buy or sell a currency pair at any given time. Unlike traditional forex trading, essentially automated Forex trading is a software system that allows traders to set rules for entering and exiting trades.

Trading via automated forex trading programs is commonly known also as “robo” or robot trading. It involves a software program that monitors market price movements and signals traders to buy or sell a currency pair at a given point in time.

Another version of auto forex trading is algorithmic trading which essentially involves employing programming codes and software that direct computers to open and close trades according to set rules.

What are Forex Trading Bots?

Essentially a forex trading bot is an automated software program that generates signals as it monitors currency pairs and places orders. Such bot trading is particularly popular with traders who seek to minimize the time they must spend on trading activity as forex trading bots automatically carry out the monitoring of the market for suitable trades once a trader sets outs the rules for entering and exiting the trades.

There are many forex trading bots that are offered for free online by both various brokers and developers. Caution is advised though before using them for real trading as there are numerous reports many such forex trading bots have been associated with scams.

It is important therefore to verify the effectiveness of forex trading bots by trying them first on real data without actually investing your money. This trying can be done particularly by trading on a demo account.

A demo account provides the opportunity to try the trades a forex trading bot suggests under real-market conditions by using virtual funds. Most brokers offer free demo trading accounts which give access to exactly the same trading platforms and features as a live trading account.

Another way to check the effectiveness of a forex trading bot is paper trading. In paper trading the trader would write down the time and size of his hypothetical buy and sell orders on paper. By then tracking subsequent gains or losses it is possible to assess the performance of the forex trading bot instead of placing real orders at a brokerage. Many brokers offer clients paper trading online simulators.

Forex trading bots can also be purchased online from numerous vendors and most forex brokers.

Building your own forex trading bot and then employing it is another principally different way for bot trading. Building your own trading bot can be done particularly for two very popular trading platforms – MetaTrader 4 (MT4) and MetaTrader 5 (MT5). This however requires knowledge of their programming languages MetaQuotes Language 4 (MQL4) and MetaQuotes Language 5 (MQL5) respectively.

An alternative to writing your own forex trading bot is hiring a programmer who will build a forex trading bot for you.

How to Develop an Automated Forex Trading Strategy

A trader has to decide what forex automated trading strategy he wants to employ if he chooses to buy a forex trading bot, build his own forex trading bot or plans to hire someone to build algorithmic forex trading for him.

Any forex trading strategy that a trader is familiar with and has proved itself to be effective can be used as a basis for an automated forex trading strategy. Hence there are great many automated forex trading strategies. All of them can be very broadly classified as the following four main automated forex trading strategies.

Trend-Based Automated Trading Strategy for Forex

One of the most widely employed automated trading strategies for Forex involves following market trends. A trend occurs when a price is moving in a certain direction - either up or down.

When there is an upwards trend, the automated system will open a long position – buy in anticipation of the currency rising in value, to sell it later at a higher price as a way to earn a profit.

When there is a downward trend, the automated trading strategy for Forex will go short - sell off the currency to purchase it again later at a lower price.

Trend-based automated trading strategies rely on automated systems’ ability to predict the continuation of a trend by comparing current data with historical data.

Average Price/Mean Reversion Automated Trading Strategy for Forex

Another popular automated trading strategy for forex is based on observation that often prices return to their average levels. This strategy attempts to capitalize on sharp changes in the price of a currency expecting it to return to its previous value.

The mean reversion strategy also involves opening both long and short position depending on anomalous price movements. In case an exchange rate shoots up unexpectedly the automated system opens a short position, while a sudden drop in the price triggers a long order.

A high level of understanding of sophisticated financial markets is required for developing an effective mean reversion automated trading strategy for Forex. There is no guarantee an exchange rate will return to an average price as a big move may be triggered by certain events which have caused long term disbalances in markets.

High-Frequency Automated Trading Strategy for Forex

High-frequency trading often referred to as scalping, is the method of using an automated system to make thousands of trades in a fraction of a second. It can earn sizeable returns but it must be noted that this strategy is mostly employed by big players who trade in big blocks.

News-Based Automated Trading Strategy for Forex

A news-based trading strategy involves algorithmic systems reacting to news updates. It is a well-known feature of forex markets that currencies react to political and economic events such as political unrest, natural disasters, inflation, elections and others. News-based automated trading strategies generate trade signals based on what is happening in real-time and usually involve holding positions for a short length of time – markets adjust after the news.

How to Choose Automated (Hands-Free) Trading Software/Broker in 2023

Read Reviews

When considering which automated trading software or broker to use for bot trading, one must first of all consider whether the automated trading software/broker is effective and trustworthy.

Traders are advised to verify the accuracy of claimed high percentage of winning trades before choosing automated trading software a vendor offers. This can be done by trying the automated trading software on demo accounts.

Some software publishers provide authenticated trading history results to show the effectiveness of the programs they are offering.

Checking reviews is another way that can help to choose between automated trading software/brokers. An online search will bring up a list of brokers who offer auto trading support, as well as specific automatic trading software reviews.

Define Your Needs

It is important to define your needs to determine which automated trading software will suite you best. Automated trading systems vary in terms of performance, complexity, programmability and speed.

Other features worth considering is what reports automated trading software can generate and what orders can it place.

Basic tasks that automated trading software should be able to complete include:

• Generate reports or trading alerts automatically
• Place stop orders
• Manage trailing stops
• Place conditional orders directly on the Forex market
• Trading in tick, or High-Frequency Trading/scalping
• Additional features worth considering are:
• Real-time market monitoring
• Remote access capability if you intend to be away from your PC for a long time

• Virtual private server hosting, or VPS, which provides fast internet access and isolates the Forex automated software for security purposes, and also offers technical support
• Return guarantees, terms and conditions

Pros of Using Trading Bots

Bot Trading Is Emotionless

When employing bot trading, positions are entered and exited according to programmed criteria once they have been met in the financial markets. This excludes personal involvement in the process and removes any emotion - negative or otherwise, from the decision-making process.

This helps traders to stick to their trading plans. However, it is important to understand that there is no trading plan or strategy which will win all the time.

High Order Entry Speed

Often financial markets move quickly. Trading bots can respond immediately and place orders as soon as the predetermined criteria are satisfied.

Ability to Backtest

Backtesting allows a trader to test on historic price data the trading strategies that he sets in the trading bot. This practice allows making improvements to trading strategies, with the implicit assumption that trades that have performed successfully in the past will perform well in the future.

Cons of Using Trading Bots

Need to Be Monitored

The biggest attraction of trading bots - the ability to implement trades automatically, leads many traders to let trading bots operate unsupervised relying on their ability to run alone without human input. However, losses may accumulate after initial successful trades as market conditions change, warranting a review of the trading strategies being employed.

It is therefore important to monitor trading bots operations to prevent loss accumulation that can wipe out your trading capital. Monitoring allows also to recover control in case of computer malfunctions or loss of internet.

Over-optimization

The ability to try a trading strategy on historical data and improve its effectiveness by changing criteria set in trading bots builds an expectation that the modified strategy will perform successfully in a live market. This is what is known as "over-optimizing" a strategy: "perfecting" a strategy for the occurrences which took place historically. However, markets change and unexpected developments will render a strategy that was successful under historical conditions ineffective in the light of future events.