Automated Trading
Trading the forex market or any form of the financial market involves a lot of “variables”. As technology razed through our everyday lives, the “world” of the financial markets has not been spared. In this post I will be going over automated trading, trading algorithms, and expert advisors, how to use automated trading, and the advantages and disadvantages.
What is Automated Trading?
Automated trading refers to the use of automated systems (robots/algorithms) to trade financial markets. In this post, I will be focusing majorly on the forex market. It involves setting up a computer program with defined instructions on how to respond to market action with minimal manual input.
Automated trading systems are created to ease part of the drag of trading forex. They have also gained more popularity recently. This is because more regular members of the public who do not have a full understanding of the forex market, have gained interest. To compensate for their lack of understanding they employ the use of automated systems. More about the advantages and disadvantages of using automated systems will be examined in a bit.
What are Trading Algorithms?
Trading algorithms are computer programs that are used for trading the forex market. These programs can vary widely in their capabilities depending on what they are designed for. Some programs are created using simple rules for opening, maintenance, and closing of trades. Examples include the use of generic indicators such as the moving averages, ADX, and RSI. Other trading systems can be built from custom indicators, designed for the execution of special strategies.
For any trading algorithm, it is required that explicit trading rules are set. And as earlier mentioned, can be done using a bunch of technical indicators or complex mathematical formulas.
Trading algorithms are usually programmed in the language of the trading platform for which they are intended to be used. For example, the two most popular forex trading platforms are the MetaTrader and the NinjaTrader Platforms. The MetaTrader platform uses mql4 or mql5 for MT4 or MT5 respectively, while the Ninja Trader platform uses the Ninja script.
Other proprietary platforms exist, created by different brokers. Some have automated trading capabilities while others don’t. The bottom line is that an automated trading system is designed for a particular type of platform.
What are Expert Advisors?
Expert advisors are forex trading robots designed specifically for the MetaTrader platforms. These robots are highly diversified in ability and complexity – from just alerting the trader to trade setups, to executing trades.
The creation of expert advisors requires the use of either the mql4 or mql5 languages for MT4 or MT5 platforms respectively. Traders who do not have coding skills can hire or collaborate with programmers to help put their strategies into code. There are also software/programs that can be used to build trading robots. These programs allow non-coding traders to choose the features they want for the robot while the software writes the code.
Other types of programs exist which are used to aid in trading on the MetaTrader platforms. These programs are on another level of variety. You can learn more about scripts by clicking here.
How To Use Automated Trading Systems
The major use of automated trading systems is to improve trading. This is because computer programs do not experience fatigue. As such they can monitor the markets all day long.
Automated trading systems monitor market movements and execute orders once the parameters are fulfilled, reducing the inefficiencies associated with manual trading such as missing entries due to not being physically present.
To use a Forex robot, you need to load it onto a chart and enable automated trading. You would need to be online throughout the day to run the robot effectively. This can be problematic as a result of disruptions that can occur such as internet connection failure.
Trading Platforms
As stated earlier the platform on which the robot is to be used dictates the language in which it is developed. Popular platforms for robot trading are the MetaTrader platforms using mql4 or mql5, and NinjaTrader using the Ninja script.
VPS
Hosting the robot on your trading terminal all day long may cause some issues such as delayed or failed executions due to internet connection failure. A way to overcome this is to host the robot on a remote server dedicated to that purpose. This type of server is called a Virtual Private Server (VPS).
A virtual private server is a server that has been created for the purpose of hosting forex robots. This has multiple advantages such as an uninterrupted internet connection, fast execution, etc. These servers are offered by different providers, and you have to pay for a subscription to be able to use them.
You can order a VPS directly from the MetaTrader terminal nowadays. Some forex brokers also offer VPS, with some having promotions in which you can get it for free.
Before paying for a VPS, make sure the server has a very low ping. This dictates how fast your robot will be able to execute orders. The ping is also affected by the geographical location of the server. A server with high ping can result in latency causing slippages, which can lead to terrible robot performance – losses.
Also make sure you can trust the provider, as you do not want to be scammed.
Advantages of Automated Trading
The following are the advantages of automated trading:
- Removes emotion and lack of discipline.
- Fast execution
- Backtesting
- Diversification
Removes emotion and lack of discipline
Trading with a robot eliminates emotions in trading as long as there is no human interference. A robot is coded to follow preset rules stipulated in the trading strategy and is not subject to feelings that can make it break from these rules. Emotions have a huge role to play when it comes to manual trading, requiring mastery as it can mar your trading.
Closely related to emotions, discipline is another factor attributed to manual trading that the robot is not prone to. The robot follows specific rules period.
Fast execution
Trading with a robot ensures faster execution of orders once parameters are met. The difference in time can be very significant in highly volatile markets. A computer places orders in milliseconds much faster than manually moving your mouse to open an order. A way to improve the speed of execution is to get a better internet connection or host your robot on a good VPS with low ping.
Backtesting
Robots after creation are usually tested against historical data to see how it would have performed. This can give an idea of what is to be expected from the robot in the future.
Backtesting also gives room for fine-tuning the strategy. This should however be done with caution to avoid curve fitting, which can be very disastrous. While trading strategies can be backtested manually, it is so much easier and faster with robots.
Diversification
Manually monitoring a host of market instruments can be tiring. This is not so for robots. Robots can be used to monitor different markets simultaneously without a reduction in efficiency.
This allows traders to diversify their portfolios, implement multiple strategies, or even trade multiple accounts simultaneously.
Disadvantages of Automated Trading
The disadvantages of automated trading are as follows:
- Being prone to technical malfunction, crashes, etc. – No system or server is 100% immune to technical issues. This can result in a malfunction of the robot.
- Curve-fitting and over-optimization – As mentioned earlier, backtesting on historical data can result in continued optimization in a bid to yield perfect results. This is known as curve fitting. The problem lies in the fact that the market is not perfect. The robot as a result of over-optimization becomes so streamlined to the historical data that it cannot perform moving forward.
In conclusion, the use of automated trading systems has its advantages as well as some drawbacks, however, a lot of individual and institutional investors use it. Somehow it boils down to finding what works for you – which is better suited to you, manual or automated trading.
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