Automated trading, sometimes referred to as algorithm trading or a mechanical trading system, uses software that is supported by algorithms to carry out trades quickly. Using pre-programmed trading instructions based on time, volume, and price, investors and traders input trading software. By enabling quicker execution of your trading techniques, automated trading can help you improve the effectiveness of your deals. Learn more about the benefits of using automated trading systems and how they can benefit your trading approach.
What is automated trading?
Automated trading is a way to take part in the financial markets by employing a computer programme that places transactions based on pre-set entry and exit criteria. You, the trader, will combine meticulous technical analysis with establishing opening orders, trailing stops, and guaranteed stops for your holdings. The entire process of your trades is then handled automatically, saving you time spent keeping an eye on your positions.
With auto trading, you can execute numerous trades quickly with the added advantage of removing emotion from your trading decisions. That’s because the parameters you select already include all the necessary guidelines. Some algorithms even let you follow trends and make trades based on your pre-planned tactics.
Automated trading systems can also make use of much more comprehensive strategies, which call for a deeper knowledge of the particular platform and its programming language. In order to create the system for this more complex trading approach, the trader frequently collaborates closely with a programmer.
Building a custom system requires much more time and money, but if done properly, it could yield a good return and offers much more flexibility. To understand how the algorithm would have done in the past and to give a more accurate performance prognosis for the future, historical market data can be used for backtesting. You can see a selection of my best forex robots if you are looking for some inspiration along the way.
How does automated trading work?
With automated trading, you can automatically speculate on the increase or decrease of the underlying market price of currency pairs and other assets.
You should first select a platform and establish the specifics of your trading strategy. Then, using the rules and conditions you’ve developed through your trading expertise (referred to as parameters), your bespoke algorithm will use the criteria to execute trades on your behalf.
The timing of the deal, the price at which it should be opened and closed, and the number are typically the deciding considerations. E.g. Open a buy trade on the EUR/USD when the 50-day moving average crosses above the 200-day moving average.
The defined automated trading method will continuously track price movements on the financial markets, and if certain criteria are satisfied, trades will be carried out automatically. The goal is to execute trades more quickly and effectively while taking advantage of certain, technical market developments.
Automated trading pros & cons
- Trade the forex market automatically so it provides a hands-off solution
- Does not require any prior trading experience or particular skill set
- Lots of different automated trading systems to choose from
- Can save time from needing to constantly scan forex charts
- Can eliminate needless mistakes made through human error
- Sticks to the trading strategy based on the algorithm at all times
- Automated systems cannot see some things that the human eye can
- May be vulnerable to hardware and software failures
- Lots of automated software scams to try and avoid
- Automated trading strategies can sometimes be too rigid
Automated trading vs manual trading
There is no one right strategy, as demonstrated by a comparison of trading systems; in fact, combining the two strategies might increase your profits the most.
Each trader should adhere to a certain plan, but because the market is dynamic, the trading strategy must also be flexible. These modifications may be global (asset correlations, responses to specific statistics, etc.) or local (volatility adjustments, level responses, breakout/rebound patterns, etc.).
A trading bot that used to function well might no longer be as effective as previously due to the fact that small adjustments might add up and have a bigger effect than anticipated. As a result, timely changes are required for both human and automated trading techniques.
Keep in mind that no computer programme can ever fully replace a trader. You cannot rely on a bot and unsupervised trading terminal. Yes, a bot can speed up repetitive tasks, but a trader must still monitor the process and continue to analyse the market (albeit less thoroughly).
By placing traders in realistic situations, manual trading helps traders gain experience and make better trading judgements. A trader develops a natural instinct for both technical and fundamental analysis. Trading manually gives investors greater control over what they can do in a specific circumstance. When a trader is employing a manual approach, it is simple to determine what is in their favour. Manual trading, however, necessitates a disciplined outlook. In this situation, beginners frequently become emotional, see enormous riches, and make mistakes that frequently lead to losses.
Due to the statistical advantage in their favour and the trading robot’s lack of emotion when executing deals, traders using automated trading will be able to maintain consistency in their trading. Unlike manual trading, there is no question of suffering a loss and no need to battle with the trading strategy. As a result, this is a popular approach for newcomers who have no idea how to begin trading.
Does auto trading work?
Although auto trading systems are not flawless, it is apparent that they function when used correctly when you consider that, according to reports, the bulk of trading on significant stock exchanges is handled this way. In reality, auto trading is simply programming a trading system rather than manually following it, which includes the entry, exit, and money management criteria required to trade markets. Since it fully eliminates emotions from investing, automated trading may even be preferred over manual trading.
Is auto trading legal?
Auto trading is entirely legal in all markets, including those for currencies, stocks, and commodities. I am not aware of any legislation or rules that have been passed that forbid trade of automobiles. However, each broker has the discretion to decide whether or not to permit auto trading in an account. While most accept it, some companies forbid it for their clients. You are always free to use auto trading to improve your trading and possible profits when you trade with a reliable forex broker.
Is automated trading right for me?
If you’re seeking for a method that enables you to trade in accordance with predetermined parameters, automated trading may be the best option for you. This is especially useful when attempting to avoid trading emotionally. For those looking for a low maintenance trading approach that makes use of cutting-edge technology, automated trading is a viable option.
How to start using automated trading systems?
First of all, you will need to choose an automated trading platform. MetaTrader is the most popular forex platform for running automated trading systems. Once you have downloaded and installed the platform, you can choose from the thousands of free and paid automated forex strategies that are available. When choosing a forex robot for MT4, you will want to look for verified results, backtests and robot reviews. Some of the most important statistics to be aware of include profit, loss, drawdown, profit factor, average win/loss, trade frequency and duration the account has been running. I have complied a handy guide on how to avoid forex robot scams which you may find useful when making your choice.
Conclusion: are automated forex systems worth it?
If you do not have the time or skills required to manually trade the forex market, then you might want to consider an automated trading system which can do all of the work for you. Whilst there are thousands of automatic strategies to choose from, there is no guarantee on how well they will perform. Whilst they may remove some of the negative emotions that can impact your trade decisions, they cannot account for external factors that may impact the forex market. I personally feel like nothing can beat learning how to trade manually by yourself. You can always practice on a forex demo account and learn from your mistakes risk free. This can be a good way to improve your trading skills and build some confidence before trading in a real live environment.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.