What is automated trading and how to do it in Forex?

It is estimated that more than 60% of trades are done automatically in the Forex market. This number is dynamic and often changes.

Algorithmic trading is also referred to as robot trading. Robot trading has a massive effect on the markets. And therefore, even if you are not planning to use automation in your trading, learning about the process can improve your understanding of the financial world.

The practice has its advantages and disadvantages compared to manual trading and we’ll discuss them in more detail.

Automated vs Manual Forex Trading

Manual trading is done by humans using market orders. And it’s a well known fact that human emotions are bad for achieving satisfactory results. Successful traders master their emotions. Any professional trader will tell you that discipline and emotionless trading is their top priority. Emotions make traders greedy and result in overtrading. On the opposite end, emotions can also limit trading due to fear. In any scenario, emotions prevent traders from taking full advantage of trading opportunities.

In addition, greed and fear limit traders’ abilities to properly manage their risks. What’s more, humans need to sleep, eat and take vacations. Whereas, trading algorithms do not share such weaknesses. Robots do not get sick and they don’t take a day off from work. They are active 24/7. Moreover, humans are prone to making mistakes. Algorithms guarantee that trades are executed at predetermined prices and with a great precision.

Furthermore, testing your trading strategies is more difficult when trading manually. Robots are very systematic and can easily conduct a backtest. In addition, there are limits to how many markets we can scan manually. On the other hand, algorithms can scan various markets simultaneously.

Algorithmic trading is more speedy and precise. As a result, it is mostly utilized in high frequency trading. For high frequency trading, fundamentals are less important and the accent is more on technical trading.

Maybe it seems that humans are worthless and we should let robots fully take over the trading activity, but that’s not true. We have certain advantages over algorithms. The obvious one is that we have a brain and can analyze a larger spectrum of events much better. We can read the news or watch a politician’s speech and use the information to make a prediction. Robots can only see the numbers. They act as they are programmed to act.

Pros and cons of automated trading

Automated trading has its advantages and disadvantages. If this was not the case, robots would fully take over trading.

Pros of automated trading	Cons of automated trading
Robots do not feel, do not get tired and do not make mistakes.	Robots can not analyze fundamental data as well as humans can
It’s easier to back test automatic trading strategies.	Algorithmic trading requires upfront costs on purchasing or developing the robots.
It’s easier to scan many different markets simultaneously.	Automated trading requires constant supervision as market conditions often change.
Trades are executed faster with great precision.	Less effective for long term position trading.
Algorithms are available 24/7.	When copy trading, you don’t grow as a trader.
Suited for technical, high frequency trading.
Automation can save trader’s time.

The main disadvantage of trading with algorithms is that robots can not analyze the complex fundamental information as well as humans can. They cannot act appropriately when something unexpected happens. What’s more, robots are built to outsmart each other. In trading you can find many algorithms that predict what other algorithms will do. As a result, the market becomes very competitive. If you ask an economist why making money is so difficult, he or she will reply that the reason is competition. And the competition in the world of algorithmic trading is some of the toughest.

In order to be able to use algorithms in your trading, you can learn coding or hire someone to create a robot for you. Keep in mind that different trading platforms use different programming languages. cTrader uses cAlgo, the language is simple compared to MetaTrader software’s MetaQuotes Language 5 and 4. What’s more, you can just simply purchase a ready to use robot from the market. MetaTrader robots are called Expert Advisors EAs and cTrader algorithms are called cBots. Keep in mind that not all of the algorithms are working properly and you should do research before making the decision.

Backtesting in automated trading

Backtesting trading strategies super easy when trading using robots. The reason behind this fact is that algorithms use strict rules when placing orders and they base their decisions on numbers. Modern trading platforms offer automatic backtesting capabilities to the traders. As a result, all you need to do is to click a button and the program will do the rest.

Backtesting when trading manually is more complex as traders usually test their strategies manually. They use the historic charts and previous market news to draw the conclusions.

Copy trading vs automated trading

Copy trading is a variant of automated trading. However, copy trading and trading using your own algorithms are two vastly different things.

Copy trading refers to a type of trading that enables you to copy other successful traders. These other traders might be trading manually, automatically or might even be using both at the same time.

When copy trading, once the trader that you copy places an order, the similar order gets placed automatically on your account. The proportions are suited to your balance of course. For instance, if this other trader risks 1% of his/her balance, similarly, your trade will have the same 1% risk of your balance.

Copy trading is usually not free. The better and more successful the trader, the higher the price for copying services. Selecting the proper trader to copy is not an easy feat. Usually you can see the traders progress in percentages but not in numbers. It’s more difficult to double a million dollars than it is to double a 100 bucks.

When you are outsourcing the trading decisions, you don’t learn anything. All the responsibilities and lessons go to that other person or trading algorithm.

Trading platforms for automated trading

Trading platforms play a major role in automated trading. Most platforms enable traders to use robots and copy trade.

MetaTrader 4 was created in 2005. The software is very powerful, which is the reason why it’s still actively offered by most of the Forex brokers. The platform is easy to use and it’s generally made for trading currencies. On the downside, MT4 has outdated design and is usually limited to trading Forex pairs. MetaTrader 5 was released 5 years later by the same parent company, MetaQuotes. MT 5 offers a wider range of trading assets.

Both MetaTrader 4 and MetaTrader 5 platforms enable traders to automate their trading using algorithms called Expert Advisors (EAs). What’s more, you can copy trade or become a signal provider yourself.

If you are a successful trader, you can use your results and gain a following. You can sell your signals using the automated trading platforms.

The reason why MT4 and MT5 are outstanding when it comes to trading automation is that these platforms are some of the oldest in the industry that are still in use today. Thanks to this fact, there can be found the largest pool of trading algorithms or in this case Expert Advisors.

Dangers of automated trading

As already mentioned, MetaTrader platforms offer the largest pool of trading algorithms. However, this can be considered as positive and negative at the same time. While it’s great that traders can choose from a large variety, there are many EAs that do not work. Some of the EAs are outdated, some of them are working well and some of them have never worked. Some EA creators are scammers. You should never buy an algorithm blindly. Always do your research to find out whether the robot is valid or not.

The effect of automated trading on financial markets

Robots are taking over not only the trading industry, but they are automating many other industries as well. As a result, some duties are rearranged, whereas many other jobs are disappearing completely. Institutional traders are being replaced by software developers. In the future, the changes might be more radical due to the constant development of automatic technology.

Competing against well funded automated trading systems is challenging. At the end of the day investors that have the access to the best technology and hire the best developers have the upper hand. Quantitative analysts are the ones creating automated trading systems.

Algorithmic trading has already made its effect on the financial markets. Most trades are done by robots. Many believe that the 2007-2008 financial market crash was caused by trading algorithms. It’s obvious that those algorithms have played a major role as some US equity markets were up to 80% automatically traded by that period. The main component in these algorithms’ decision making was risk assessment. When everyone and everything started selling, there was no going back. Markets crashed and many people lost their jobs.

It’s hard to say what will happen in the future. It’s obvious that computer programmes are becoming increasingly smarter. Maybe one day robots will replace the human’s ability to analyze fundamental factors too. From today’s standpoint, there is a place for both: manual and automated trading in Forex.

Main takeaways

To sum everything up, algorithmic trading takes a large portion of today’s trades. More and more jobs are available for quantitative analysts. Maybe one day trading bots can replace humans but for now there’s a place for manual and automotive trading.

Manual trading enables traders to position trade and use fundamental analysis better. Algorithmic trading enables high frequency trading and is mainly dependent on technical tools.
Robots do not have feelings, they don’t get tired or sick. On the other hand, they are pretty bad at conducting complex analysis.

You should be careful in choosing the right trading robot as many of them are not working properly. What’s more, you can develop your own trading robots instead of buying one on the market.

Copy trading enables you to copy other successful traders. However, as a downside, you learn very little when other people are making decisions on your behalf. In addition, choosing the right trader to copy is difficult as you can only see the performance based on percentages and not on actual equity.

No matter if you choose to trade using algorithms or not, keep in mind that successful people do not make the right choices, they make their choices right.

FAQs on automated trading in Forex

Is automated trading profitable?

It depends on many factors. If you are copy trading, your profitability depends on the level of profitability of the trader that you copy. In case you are using trading robots and are trading on your own, the profitability depends on the trading algorithms.

Is automated trading safe?

Automated trading is as safe as manual trading. Automated trading is just a method of placing orders. In order to increase the level of safety, make sure your broker is regulated and authorized by top tier financial institutions. In addition, make sure your funds are kept in segregated bank accounts and the broker offers negative balance protection.

Which platform is best for automated trading?

There are various trading platforms offering trading automation capabilities. MetaTrader achieves automation using algorithms called Expert Advisors (EAs). MetaTrader platforms are the best for algorithmic trading as these platforms are the oldest and still very popular among traders. There are many EAs available in the market. However, you should always do your research before purchasing an EA as there are many scams and ill working algorithms on the market.

Is it worth to copytrade?

It depends. Some people make copy trading a success. However, keep in mind that when copy trading, you learn very little as a trader. When you are learning the ropes, ideally you want to receive signals that are well explained to understand how trading strategies are created. Downside of copy trading is that it’s usually not free and you can not see other people’s equity gains. You can only see gains in terms of percentages.