Automated Trading Explained

Introduction to Automated Forex Trading

Automated trading is a mainstay of the retail forex trading sector. It’s sometimes referred to as algorithmic trading. Near enough every broker offers at least one of the mainstream trading platforms available on the market. The most common platforms offered by brokers are MetaTrader 4, MetaTrader 5 and cTrader. TradingView is also a popular choice for traders willing to pay a subscription for their platform. However, most brokers offer access to a trading platform for free. There are other platforms which support automated trading but they may require a license or subscription for traders to use. Most forex trading platforms offer automated trading functionality. This article is not a technical guide on how to build trading robots, but rather an introduction to the concept of automated trading.

Why Automated Trading is Popular?

One of the key principles which have made automated trading so popular is that it removes the human factors from trading. The human factor is not just emotion, even though this is a large part. Also, there is the fact that we need to sleep, eat, socialize and our brains can only handle so much information. Automated trading robots, however, do not need to sleep and they do not react based emotions. Human psychology is after all one of the main reasons that traders lose money. Another key point is that humans have a limited capacity for how much they can do and how fast they can do it. A trading robot can simultaneously analyze and trade many different markets. This means more trading opportunities can be found by a robot as opposed to a lone trader looking at just a few charts at a time. They can also process information faster and enter orders faster than humans, which is very important for fast-moving financial markets such as forex. Not only can software react fast than a person clicking on their most, the ease of access to relatively powerful VPS’s means that the robots can be placed much closer to the source of information. For example, a trader in New Zealand can actually install their cTrader platform on a VPS in London and run their cBot from there. This adds to the advantage of speed. 

Advantages of Backtesting

The best way to test out a trading strategy is to test it against previous events. This is called Backtesting. Considering there is so much market history out there, it can take days, months or even years to test your strategy. Luckily popular trading platforms such as cTrader are able to offer powerful backtesting capabilities. This means the platform can crunch the numbers in minutes. It’s also important to note that the backtesting data can vary from broker to broker and therefore the performance of the strategy will vary. If the results are not what you expected, you can tweak the strategy and run the test again. Some traders may even do this, even if they plan to trade manually.

What Can do Automated Trading Robots Do?

The main advantages were highlighted in the previous paragraph. The purpose of an automated trading robot is to automate the actions of a trader. Based on how it’s programmed the robot will react to specific conditions of the market the will open, close and modify positions. The trader who designed the robot decides in advance what they want the robot to do in certain situations. When traders are managing their own account they may break their own trading strategies and rules. They may do this by exiting positions early because they either want to capture the profit they see or they are afraid of the drawdown and risk of losing money. Traders may increase their position sizes and therefore take on more risk in order to earn more money to cover previous losses. A robot just wouldn’t do any of these things.

A trading robot is made up of rules which are based on reacting to certain triggers. The robot can incorporate one or many technical analysis indicators which may be preinstalled in the trading platform or custom developed ones. The robot will be told which order types to use, when to enter and when to exit a position, how much risk to tolerate before closing the position and how much profit to take, how long to keep positions open for if no other triggers to close are met. Plus many more.

Are Automated Trading Strategies Safer?

Trading and investing is never risk-free, anyone claiming otherwise is probably a fraud. At the end of the day, automated trading strategies are designed by people. Failure can be caused by a flawed strategy or a bug in the code. Automated trading strategies are simply a tool that can be helpful, but that doesn’t necessarily mean that they will be. It can take years to design a profitable strategy and no strategy can ever be profitable 100% of the time and successful traders know this. Being a successful trader is about being profitable more often than not.

Who has Access to Automated Trading

Luckily it’s not just hedge funds and prop-shops who have access to trading algorithms. Automated trading tools are available in cTrader and a lot of other platforms too. Trading robots are usually created by traders themselves who have a specific strategy in mind. You may have development experience yourself or you can look to a professional developer to code your robot for you. Some trading platforms have a proprietary language for creating automated trading strategies. cTrader, however, uses c#, which is a very popular programming language. It may be a good idea to learn the basics yourself or you can just hire a pro. Another option is to buy a trading robot off the shelf. Some traders sell their strategies as a product, however, you should always be extra careful when doing this.

How to Start Automated Trading

If you want to get started, the first step is always to research and learn. Inside the desktop version of cTrader there is a section called “Automate”. In here you can see a number of sample robots which show what the code looks like. There is also an API library which shows all the information the platform lets your robot know about and all the commands the platform lets your robot do.

As a final note, before you get started building your automated trading strategy, you should carefully consider the platform you will commit yourself to. It’s not easy to migrate a developed strategy from one platform to another. Many traders have used MetaTrader 4 as their platform of choice for creating their EAs (Expert Advisors). Using MT4 now would be a horrific decision since the platform will soon be obsolete. Building a trading strategy on a platform like cTrader which only gets better over time, as opposed to outdated and phased out, would be an ideal decision.

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