Using the automated trader might seem a little like cheating – after all, the computer program does the work. But more people than ever are using an automated trading strategy either exclusively or as part of their overall approach to Forex trading. So how do these strategies work and what are the benefits of using automation for new and experienced traders?
Algorithmic trading strategies
While the phrase ‘algorithmic trading models’ might sound very technical and complicated, it works on the same principles as many other familiar websites and software. Facebook, for example, uses an algorithm to decide what content to show on your home feed. Google uses a complex algorithm to determine what results to show you when you search for something via its search engine.
An algorithm is a series of rules programmed into a computer telling it what to do. So, if situation ‘a’ happens, the computer will take action ‘a’ following its program. Of course, it is a lot more complicated than that, but the basics of an algorithm are that the computer follows a set of rules laid out by experts and programmers.
Advantages of automated trading
Automated trading has some benefits for both the newcomer to Forex and for experienced traders.
For starters, the automated element removes human emotion from the system. Using your ‘gut instinct’ to decide what trades to make is one way to do things and can result in massive profits – but also massive losses. Computers don’t use emotion to make decisions. However, they use their programming and lightning fast decision making based on what they know. It can improve results and remove the riskiest trades from consideration.
Fear of making a loss and trying to make a little extra profit even when it isn’t there are all things people do. And that’s okay because we are human. But with the use of Forex trading algorithms, it’s a thing of the past. You can be disciplined in everything you do because you follow the software.
Backtesting is a system used to apply trading rules to historical market data to see if a trading idea works. It then creates rules which can be used in the programming of the robots, behind the automated trading software, and to develop automated trading strategies. This system is also great way to improve the efficiency of the software, increasing the chance that it makes victorious and profitable trades.
Better order entry speed
Sometimes a trade fails because you merely didn’t get it done quick enough, but this is less of a worry for a computer program as it can perform many lightning-fast calculations per second, and act on those predictions just as quickly. As soon as you enter your position, all the orders are then automatically generated including profit targets and protective stop losses.
Disadvantages of algorithmic trading
There are some disadvantages to this kind of trading that you should consider before committing yourself to it.
Failure of the algorithm
Perhaps the most significant fear when using algorithmic trading strategy is that the algorithms are faulty or won’t work well. If they fail and don’t do their job, then the money could be lost. That’s why it is essential to use a top-quality platform for your trades. Look for a platform such as RoFx.net that has a history of successful trades behind it – over seven years’ worth at the time of writing. That way you can be sure that the automated trading algorithms are reliable and make a profit more times than they don’t.
Not sufficient monitoring
An algorithm is only as good as the people who program it and if these people aren’t the best, then neither will the program be. Algorithms for trading are usually a collaboration between experienced traders and qualified programmers, to create robots that have the knowledge of a trader and the reliability of a program. They are also closely monitored with current stats available, for anyone to see, to show they work and have been working for some time.
Automated trading strategies that work
So these are the pros and cons of using these complex day trading algorithms for your Forex trading. Now let’s take a little look at some of the automated trading strategies that work for traders and see what kind of systems are currently making people money.
First, let us understand the concept of patterns in Forex trading. A trend is a tendency for the market to continue moving in a general overall direction. A system that follows trends attempts to produce, buy and sell signals that follow the formation of new trends.
There are lots of ways to see where a trend starts and ends and many simple automated trading strategies that work with them. But there are some words of caution with regards to trends:
• They can be challenging to stick with
• Significant trends are often infrequent and therefore may not exist when you look to trade
• Conditions that signal the potential start of a trend are also rare
It means that trend strategies can often see a lot of losing trades but the occasional, infrequent much larger winning trade. The good news is that using automated trading in this kind of strategy helps to increase your chances.
Markets sometimes change between bands of support and resistance known as consolidation. A breakout is when the market moves beyond the consolidation to reach a new high or low. For a new trend to begin, there must be a breakout at the start, so there’s a sign of a new trend beginning.
Of course, there’s no guarantee of this, and that’s why automated strategies can help manage the risk. They can look at historical data to decide if the breakout will result in a new trend or not.
3. Simple moving average
Another starter’s trading strategy is called a simple moving average or SMA. It is a lagging indicator that looks at old price data than most other strategies and therefore moves more slowly than the current market price. The longer the average period used in the SMA, the slower it moves. It is why traders often use a longer SMA with a shorter one.
SMA strategies are used in algorithms in many ways – for example, if a buy signal comes from a breakout, the trader will look to see if the short SMA is above the long one. If it is a yes, they place the trade, but if it is a no, they hang on. Those same principles can be programmed into an algo-trading robot.
4. Carry trade
A carry trade is a commonly used type of trade for beginners and experienced traders alike. The idea is to profit from the difference in yield between two currencies. Take a scenario where someone borrows Japanese yen, and the benchmark interest rate is meagre or zero, so the cost of this debt is minimal. They then exchange this to Canadian dollars and invest in a government bond at 0.6% interest. It means the interest exceeds the cost of financing the yen debt.
Of course, there are drawbacks to the system, and this is where the algorithm can help. It can select the right currencies based on factors such as low volatility FX pairs to help make the chance of a profit a higher one.
Finding the right platform
Using algorithmic trading for Forex is an excellent way for novices and experienced traders to maximise their profits. The price of using a poor-quality algorithm can be high, so you always want to use a site with a proven track record and precise data that you can view before you commit any money. Look for guarantees and protection such as stop loss and the ease of withdrawal all adding to the picture of a quality Forex automated trading platform in which to bring your money.