The pros and cons of forex trading with automations.

Automations in exchange trading have been around in one form or another since the 1980s, though the concept of rules-based trade strategies dates back even further, to the 1940s. As retail investing has exploded in popularity around the world, popular trading platforms have adapted to enable forex traders to write and publish their own automations or 'trading robots'. Likewise, the evolution of computer processing power led to the rise of more advanced forms of automation.

What Is Automated Trading?

Like many terms in retail investing, 'automated trading' covers a broad range of activities intended to make monitoring markets and executing trades faster and more efficient by outsourcing certain tasks to computer programs.

Basic automation might entail inputting a specific set of buy and sell parameters into your preferred trading software with a command to execute an order when those parameters are met. The sophistication of your automation largely depends on the complexity of your trading strategy and knowledge of programming, with more experienced traders adding increasingly narrow conditions and interlocking sets of commands.

Whether it’s a simple set of buy-sell price conditions or an elaborate combination of if-then commands, all automated trading relies on a computer program to perform each part of the trading process. Once you’ve input your order prerequisites, you’re free to step away from the screen while the faithful robot tirelessly scans the markets for opportunities, moving with lightning speed to act on your behalf when it spots a suitable trade.

As technology has evolved, automated trading has come to include other trading styles, such as algorithmic trading, social trading and copy trading.

Algorithmic Trading

Algorithmic trading allows traders handling large quantities of assets to manage trading costs by slicing orders that might otherwise be too large to execute efficiently under favourable conditions into smaller tranches.

Many traders use 'algorithmic trading' and 'automated trading' interchangeably, but they’re not quite the same. Traders can automate an algorithmic strategy to allow computers to handle each part of the transaction, including when to trade, however, the algorithm that gives the trading strategy its name only handles one component: the division of the order and its execution .

Social and Copy Trading

Social trading and copy trading use specially created trading bots to send ‘signals’ to a trader when a particular investor places an order. A separate automation then mimics this order, in the case of copy trading, or simply observes and assesses if you’re a social trader.

What Are the Benefits of Automated Forex Trading?

Given its exceptional popularity, you might wonder just what makes automated trading so special.

For some traders, the practical benefits make it a better choice than self-managed strategies, leaving a trading bot to monitor the markets frees up valuable time for refining a strategy. Others like the idea of managing risk by simultaneously trading across multiple platforms. In general, however, the benefits of automated trading can be summarized as 'fast' and 'logical'.

Improved Trading Discipline

The same volatility that makes forex a profitable trading environment can wreak havoc on your trading strategy if you allow emotion to take over. Watching the markets rise and fall, glued to your screen and scanning frantically for an opportunity to enlarge your profits or mitigate your losses, you’re likely to trade impulsively and abandon your carefully-planned strategy. Or perhaps you can’t bring yourself to execute an order, even though every indicator says you’ll win the trade.

Because your participation in the trading process begins and ends with developing a strategy and instructing or creating a trading robot to act on your behalf, automated trading eliminates the risk that you’ll deviate from the best-laid plans due to anxiety or over-optimism.

More Refined Strategies

The only way to test a strategy with manual trading? Put your money in the market and track your progress over time in hopes of identifying patterns in your wins and losses. It’s an expensive and time-consuming learning process that requires you to consciously sit out opportunities that arise or hold tight during downturns, both of which are emotionally taxing.

Automated trading, on the other hand, offers the option to see how your trading rules would’ve performed against historical data. Backtesting not only offers you a risk-free opportunity to refine the rules you apply to your trades, it also makes it much easier to assess what’s working in your strategy and what’s not. Without the 'noise' of one-off trades you couldn’t help but execute and months, if not years, of historical market data to use as a testing ground, you have access to clear, actionable information without risk.

Risk Mitigation

Trading robots operating on multiple accounts, or even multiple platforms, can help you to control the inherent risk of trading in highly volatile markets in several ways. Without the need to constantly monitor markets and input orders yourself, you’re free to trade across several asset classes simultaneously, distributing risk as you see fit. Alternatively, you can assign different strategies to individual trading robots in the same asset class, ensuring that you’re always on the right side of a market trend.

Faster Order Execution

One of the first things novice traders learn is seconds count. The adage that time is money was never more accurate than in the context of trading forex, where entering or exiting a trade at the right millisecond can mean the difference between significant profits and just breaking even.

Automations react immediately to market conditions, moving to execute orders as soon as your desired preconditions are met. While the human brain needs to recognize those conditions, process them and then signal your body to take action, the trading bot not only opens your position seamlessly but generates the necessary orders to protect your investment or execute the trade. All in less time than it takes a human trader to blink.

Of course, no single trading system, tool or strategy is perfect, and automated trading also comes with drawbacks. If you’re not familiar with programming, or willing to learn, you may be limited to trading via algorithms designed by someone else, rather than a tool custom-fitted to your specific strategy. If, on the other hand, you have the ability to fully develop your own automations, you run the risk of over-optimizing: creating an algorithm so closely tailored to match historical data that it fails in live market conditions.

Relying on computer software to trade on your behalf also means that you may miss out on opportunities or place losing orders in the event of technical trouble or mechanical failures. You may also struggle to reap the benefits of automations if your preferred broker can’t provide direct market access or similar trading conditions.

How Do I Automate My Forex Trading?

With successful automated traders touting on social media platforms and in prominent forex publications, the popularity of trading bots, copy portfolios and 'algorithmic strategies' has skyrocketed in recent years. MetaTrader Marketplace alone claims over 1,700 unique Expert Advisors, while a 2019 study estimated that automations fully execute 92% of trades in the forex market.

Before moving away from manual trading to explore automations, I recommend that you first ask yourself a few key questions:

  • Have I defined my trading strategy? If you’re still learning the basics of forex and testing out different trading styles, learning what works best for you, then you’ll likely need more experience to see real benefits from automated trading.
  • Does automation complement my trading style? Some trading styles, particularly those that rely on high volume, such as scalping, are ideally suited for automation. If you’re more of a swing trader, however, the time and effort involved in adapting to automations may not be worth it.
  • What’s my personality? In trading, as in life, a little self-awareness can go a long way. If you’re someone who dislikes uncertainty and never feels quite confident that you’ve got enough information, an automated, rules-based trading system will likely work to your benefit. If, on the other hand, you struggle to stick to a single plan and make your money by synthesizing information and strategies on the fly, automations probably aren’t for you.
  • Can I learn to code? While 'off-the-shelf' bots and wizard templates can help bridge the gap between manual trading and automation for beginners, to truly reap the benefits of this trading tool you’ll likely need to learn to code. If your strategy relies on methods like supply and demand, support and resistance or candlestick patterns, developing successful automations capable of handling your specific variables means taking an active role in the creation process.

If, after some reflection, you believe automations will enhance your trading experience or lead to higher profits, you can begin the process of transitioning to fully or partially machine-controlled trading by following these steps:

  • Research your broker. Not all online brokers support automations, particularly in jurisdictions that tightly regulate retail investing. Others do allow trading with the help of algorithms and robots, but only on certain platforms. Still, others do allow some types of automated trading, but not others.
  • Research your trading platform. If you intend to use automated trading as a hedge, you’ll need to confirm that your preferred platform allows trading from multiple accounts. Be aware, that the automations you create for one platform probably won’t transfer to another if you make a switch down the road due to differences in programming languages. For those with no coding knowledge, pay attention to the range of automations available for purchase in the platform’s marketplace.
  • Start with no-code solutions. Before diving into the deep end of automated trading, experiment with some simple automations using a no-code solution, such as MetaTrader 5’s Wizard or Ninja Trader Strategy Wizard. The process of inputting your trading rules and backtesting will give you a taste of the automated trading experience before you make the commitment to learning how to code. You may also opt to download an 'off the shelf' automation from your platform’s marketplace.
  • Dedicate time to coding and backtesting. When blocking off time to learn the programming language of your chosen platform, be sure to include a few hours to hone your backtesting skills. An art as much as a science, good backtesting skills can make or break the success of your automations, and you’ll need some practice to balance curve-fitting and flexibility.

The Bottom Line

Automated trading has revolutionized day trading for retail investors, allowing ordinary traders to leverage the power of machine learning to compete with much larger institutional investors and profit from market volatility.

Before adopting an 'algorithmic trading strategy', however, it’s important to assess whether this style of forex trading works well with your existing trading style, financial resources and even your personality.

The pros and cons of forex trading with automations.

Automations in exchange trading have been around in one form or another since the 1980s, though the concept of rules-based trade strategies dates back even further, to the 1940s. As retail investing has exploded in popularity around the world, popular trading platforms have adapted to enable forex traders to write and publish their own automations or 'trading robots'. Likewise, the evolution of computer processing power led to the rise of more advanced forms of automation.

What Is Automated Trading?

Like many terms in retail investing, 'automated trading' covers a broad range of activities intended to make monitoring markets and executing trades faster and more efficient by outsourcing certain tasks to computer programs.

Basic automation might entail inputting a specific set of buy and sell parameters into your preferred trading software with a command to execute an order when those parameters are met. The sophistication of your automation largely depends on the complexity of your trading strategy and knowledge of programming, with more experienced traders adding increasingly narrow conditions and interlocking sets of commands.

Whether it’s a simple set of buy-sell price conditions or an elaborate combination of if-then commands, all automated trading relies on a computer program to perform each part of the trading process. Once you’ve input your order prerequisites, you’re free to step away from the screen while the faithful robot tirelessly scans the markets for opportunities, moving with lightning speed to act on your behalf when it spots a suitable trade.

As technology has evolved, automated trading has come to include other trading styles, such as algorithmic trading, social trading and copy trading.

Algorithmic Trading

Algorithmic trading allows traders handling large quantities of assets to manage trading costs by slicing orders that might otherwise be too large to execute efficiently under favourable conditions into smaller tranches.

Many traders use 'algorithmic trading' and 'automated trading' interchangeably, but they’re not quite the same. Traders can automate an algorithmic strategy to allow computers to handle each part of the transaction, including when to trade, however, the algorithm that gives the trading strategy its name only handles one component: the division of the order and its execution .

Social and Copy Trading

Social trading and copy trading use specially created trading bots to send ‘signals’ to a trader when a particular investor places an order. A separate automation then mimics this order, in the case of copy trading, or simply observes and assesses if you’re a social trader.

What Are the Benefits of Automated Forex Trading?

Given its exceptional popularity, you might wonder just what makes automated trading so special.

For some traders, the practical benefits make it a better choice than self-managed strategies, leaving a trading bot to monitor the markets frees up valuable time for refining a strategy. Others like the idea of managing risk by simultaneously trading across multiple platforms. In general, however, the benefits of automated trading can be summarized as 'fast' and 'logical'.

Improved Trading Discipline

The same volatility that makes forex a profitable trading environment can wreak havoc on your trading strategy if you allow emotion to take over. Watching the markets rise and fall, glued to your screen and scanning frantically for an opportunity to enlarge your profits or mitigate your losses, you’re likely to trade impulsively and abandon your carefully-planned strategy. Or perhaps you can’t bring yourself to execute an order, even though every indicator says you’ll win the trade.

Because your participation in the trading process begins and ends with developing a strategy and instructing or creating a trading robot to act on your behalf, automated trading eliminates the risk that you’ll deviate from the best-laid plans due to anxiety or over-optimism.

More Refined Strategies

The only way to test a strategy with manual trading? Put your money in the market and track your progress over time in hopes of identifying patterns in your wins and losses. It’s an expensive and time-consuming learning process that requires you to consciously sit out opportunities that arise or hold tight during downturns, both of which are emotionally taxing.

Automated trading, on the other hand, offers the option to see how your trading rules would’ve performed against historical data. Backtesting not only offers you a risk-free opportunity to refine the rules you apply to your trades, it also makes it much easier to assess what’s working in your strategy and what’s not. Without the 'noise' of one-off trades you couldn’t help but execute and months, if not years, of historical market data to use as a testing ground, you have access to clear, actionable information without risk.

Risk Mitigation

Trading robots operating on multiple accounts, or even multiple platforms, can help you to control the inherent risk of trading in highly volatile markets in several ways. Without the need to constantly monitor markets and input orders yourself, you’re free to trade across several asset classes simultaneously, distributing risk as you see fit. Alternatively, you can assign different strategies to individual trading robots in the same asset class, ensuring that you’re always on the right side of a market trend.

Faster Order Execution

One of the first things novice traders learn is seconds count. The adage that time is money was never more accurate than in the context of trading forex, where entering or exiting a trade at the right millisecond can mean the difference between significant profits and just breaking even.

Automations react immediately to market conditions, moving to execute orders as soon as your desired preconditions are met. While the human brain needs to recognize those conditions, process them and then signal your body to take action, the trading bot not only opens your position seamlessly but generates the necessary orders to protect your investment or execute the trade. All in less time than it takes a human trader to blink.

Of course, no single trading system, tool or strategy is perfect, and automated trading also comes with drawbacks. If you’re not familiar with programming, or willing to learn, you may be limited to trading via algorithms designed by someone else, rather than a tool custom-fitted to your specific strategy. If, on the other hand, you have the ability to fully develop your own automations, you run the risk of over-optimizing: creating an algorithm so closely tailored to match historical data that it fails in live market conditions.

Relying on computer software to trade on your behalf also means that you may miss out on opportunities or place losing orders in the event of technical trouble or mechanical failures. You may also struggle to reap the benefits of automations if your preferred broker can’t provide direct market access or similar trading conditions.

How Do I Automate My Forex Trading?

With successful automated traders touting on social media platforms and in prominent forex publications, the popularity of trading bots, copy portfolios and 'algorithmic strategies' has skyrocketed in recent years. MetaTrader Marketplace alone claims over 1,700 unique Expert Advisors, while a 2019 study estimated that automations fully execute 92% of trades in the forex market.

Before moving away from manual trading to explore automations, I recommend that you first ask yourself a few key questions:

  • Have I defined my trading strategy? If you’re still learning the basics of forex and testing out different trading styles, learning what works best for you, then you’ll likely need more experience to see real benefits from automated trading.
  • Does automation complement my trading style? Some trading styles, particularly those that rely on high volume, such as scalping, are ideally suited for automation. If you’re more of a swing trader, however, the time and effort involved in adapting to automations may not be worth it.
  • What’s my personality? In trading, as in life, a little self-awareness can go a long way. If you’re someone who dislikes uncertainty and never feels quite confident that you’ve got enough information, an automated, rules-based trading system will likely work to your benefit. If, on the other hand, you struggle to stick to a single plan and make your money by synthesizing information and strategies on the fly, automations probably aren’t for you.
  • Can I learn to code? While 'off-the-shelf' bots and wizard templates can help bridge the gap between manual trading and automation for beginners, to truly reap the benefits of this trading tool you’ll likely need to learn to code. If your strategy relies on methods like supply and demand, support and resistance or candlestick patterns, developing successful automations capable of handling your specific variables means taking an active role in the creation process.

If, after some reflection, you believe automations will enhance your trading experience or lead to higher profits, you can begin the process of transitioning to fully or partially machine-controlled trading by following these steps:

  • Research your broker. Not all online brokers support automations, particularly in jurisdictions that tightly regulate retail investing. Others do allow trading with the help of algorithms and robots, but only on certain platforms. Still, others do allow some types of automated trading, but not others.
  • Research your trading platform. If you intend to use automated trading as a hedge, you’ll need to confirm that your preferred platform allows trading from multiple accounts. Be aware, that the automations you create for one platform probably won’t transfer to another if you make a switch down the road due to differences in programming languages. For those with no coding knowledge, pay attention to the range of automations available for purchase in the platform’s marketplace.
  • Start with no-code solutions. Before diving into the deep end of automated trading, experiment with some simple automations using a no-code solution, such as MetaTrader 5’s Wizard or Ninja Trader Strategy Wizard. The process of inputting your trading rules and backtesting will give you a taste of the automated trading experience before you make the commitment to learning how to code. You may also opt to download an 'off the shelf' automation from your platform’s marketplace.
  • Dedicate time to coding and backtesting. When blocking off time to learn the programming language of your chosen platform, be sure to include a few hours to hone your backtesting skills. An art as much as a science, good backtesting skills can make or break the success of your automations, and you’ll need some practice to balance curve-fitting and flexibility.

The Bottom Line

Automated trading has revolutionized day trading for retail investors, allowing ordinary traders to leverage the power of machine learning to compete with much larger institutional investors and profit from market volatility.

Before adopting an 'algorithmic trading strategy', however, it’s important to assess whether this style of forex trading works well with your existing trading style, financial resources and even your personality.