For retail traders, the forex market is open 24 hours a day for five days. However, it is exhausting for anyone to trade continuously 24 hours a day for five days manually. But with automated trading, traders can take advantage of this.
The majority of FX trades are automated. Automated forex trading involves the use of algorithms to execute trades rather than opening positions and closing them manually. Manual trading can at time be taxing and tedious, especially when you are dealing with multiple accounts, and you intend to trade different assets. Automated forex trading is a substitute for human trading. However, human intervention is required to adjust the levels of the algorithm to suit their trading goals.
This article will cover in detail what automated forex trading is, how it can be done, along with its pros and cons.
What is Automated Forex Trading?
Automated trading is when you use a trading software which analyses the market, and then executes trades based on a set of parameters. Most trading platforms support automated trading by facilitating the programming of automated expert advisers. For example, the MetaTrader platforms have the MQL programming language – MQL4 for MT4 and MQL5 for MT5. The MQL is a proprietary scripting language that enables traders to develop their expert advisers, customise and automate technical indicators, conduct backtests with the strategy tester to optimise their trading robots.
Note that you do not need to possess technical programming skills to auto-trade in the forex market. Traders with non-technical skills can access the trading robots from the market place. More so, several software vendors offer trading robots and EAs that are compatible with several trading platforms.
How does Automated Trading work?
Specialised trading software carries out automated trading. Programmers have designed automated trading software to make trade decisions based on market analysis. They analyse the market with the aid of technical indicators. Others base their analysis on economic activity to gauge investor sentiment while others consider price action to determine volatility.
Based on these analyses, the software generates trading signals to establish entry and exit points. Keep in mind that not all automated software will generate trading signals for the same currency pair at the same price level. That is because these EAs are all programmed using different criteria. Thus, the software opens a position only when the market meets a specific condition that has been pre-programmed into the EA. The size of the position opened will depend on your risk management measures. Similarly, the EA will use pre-set ‘take profit’ and ‘stop-loss’ levels to close the trades.
Types of Automated Trading software
Forex trading automation is either fully automated or only generates trade signals.
- Fully automated forex trading
Forex trading can be said to be fully automated when the trading software determines the entry and exit positions and executes the trades autonomously. Forex robots perform such tasks with human intervention only required to establish risk management measures. These include setting the take profit and stop loss levels, size of the trade and the size of leverage to use.
- Forex Signal generators
As the name suggests, forex signal generators generate entry and exit points. The forex signal will include information such as the price level to open a position, the take profit and stop loss levels, and optimal money management measures. Some signal generators solely rely on automated analysis of price action. A team of analysts generates other types of signals through technical and fundamental analyses.
However, you will have to execute the trades manually. Signal generators only give you alerts on when to enter and exit a trade; they do not execute the trades for you.
- Copy Trading
Copy trading is another type of automated forex trading. As the name suggests, it involves copying the trades of other traders and replicating them in your trading account.
Just like automated forex trading, copy trading requires a specialised software known as a trade copier which you instal as a plugin in your trading account. After installing the trade copier, you then select the accounts whose trades you’d wish to copy, i.e., the master account. You will be required to set risk measures for each trade, i.e., lot size, and leverage.
The trade copier mirrors all the trades executed in the master account to your account. For example, let’s say the master account opens a short EUR/USD position. The forex trade copier will instantly execute a sell order in your trading account for EUR/USD based on risk management measures that you have pre-set. When the master account closes the position, the trade copier exits your position instantly as well.
Advantages of automated forex trading
- You can use automated forex trading to manage several trading accounts either locally or remotely
- Amateur traders who are not versed in technical and fundamental analyses can benefit from the expertise of experienced traders
- Automated forex trading frees up the time a trader would have spent analysing the markets and monitoring trades
- You can apply automated trading to other asset classes such as stocks like Zoom trading
Traders can use virtual private servers (VPS), to ensure that robots and forex signal copiers are running in their trading accounts. This way, you do not need to monitor your account constantly, but you will always be aware of the trades in your account since you receive alerts. Note that the VPS allows for automated trading even when you are offline.
One of the most notable advantages of automated trading is the elimination of emotions in making trade decisions. For most traders, emotions can be a paralysing factor when executing trades. For example, let’s say you have an open trade of tech100 which is not going your way. You may be reluctant to close the trade, hoping that it would return to profitability al the while your loses are increasing. Automated trading would have exited this trade once the price reached the stop-loss level, thus preventing further losses.
There are several signal and robot vendors online. Some are accurate, and some are scammers. Make sure to conduct your independent research before using a forex robot or signal generator. The best way to do this is by asking feedback from other traders who have experience using the software. Furthermore, conduct thorough backtests and test them on demo accounts before using them on your live account.