We live in an era where computers assist humans with many tasks. Many aspects of our daily life involve the use of technology and this has exanded to trading as well. In this article we are going to examine what is Forex Trading Automation. We will also see what is a Forex Expert Advisor (also called trading robot).
Some History about Trading Automation
It all started with the invention of computers in the 20th century, first programmed to assist in mathematical calculation. Since then Information Technology evolved making computers more powerful, complex, faster and allowing the world to connect through the internet. It didn’t take long to banks, institutions and people to understand that technology could have helped trading and making more money.
The first systems to be created were charting and trding software, they helped facilitating the study of prices and execution of orders. They eventually became full trading platforms, complete software to make the trader’s job easier.
What is Forex Trading Automation
What exactly is Forex Trading Automation? We better first define Trading Automation in general. Trading Automation is that trading activity which is totally (or partially) executed by a software. Forex Trading Automation is the trading automation applied to the Forex Market. In other words, with trading automation all or some of the trading tasks are performed by a software or computer system for you.
There are sevaral ways to automate the trading activity, the main are:
- Trading Signals, trading signals are services that you can subscribe so that your software receives the trades that another system is executing and can copy them. There are free trading signals but the majority and profitable ones are usually commercial.
- Social Trading, the Social Trading concept is very similar to Trading Signal however it is based on a Social Platform. In a Social Platform, traders can share their trades and can be followed and copied by other traders, if you find the idea interesting read this article.
- Expert Advisor, this is a software programmed to execute actions in response to specific triggers. You can buy commercial expert advisors, download free ones or create your own.
As we will see later in the article Trading Automation has many advantages and some disadvantage, some people may find great benefit in it but perhaps it is not for everyone.
What is an Expert Advisor
As we mentioned before an Expert Advisor is a software that executes trading tasks on behalf of the trader. An expert advisor is basically a program that you can buy or create yourself. Expert Advisors are also known with names like Trading Robots, Black Boxes and in short form EA.
Expert Advisors are often associated with Algorithmic Trading, which is a type of trading that is based on Technical Analysis, mathematical models and statistics. Expert Advisors are in fact ideal to execute tasks responding to triggers. In algorithmic trading the triggers are determined by rules and values resulting by the technical analysis performed on prices. For Example a rule can be a technical indicator reaching a determined threshold, if this rule is met an order is triggered.
Some trading platforms allow you to install third party expert advisors and some also allow you to program your own Expert Advisors, the best platform for this in our opinion is MetaTrader 4.
If you enjoy and want to expand the knowledge about Trading Robots and Algorithmic Trading visit our books section and you can find some literature about it.
Examples of Trading Automation
Now that you have an understanding of what is an expert advisor it is useful to see some examples of tasks that can be performed by an Expert Advisor. It is a common opinion that Expert Advisors only execute trades but actually this is not correct, executing trades is only a part of the Trading Automation and you can see it in the following examples. So what can you do with a Trading Robot?
- Perform Technical Analysis, with an EA you can study functions, execute automatic calculation using prices and other mathematical functions. All these calculation are meant to understand and forecast the trend of the price.
- Send Notification, you can program an EA so that you are notified about price changes or events happening, the notifications can be triggered by technical analysis, scheduled or even by other events
- Create and send reports, an EA can create and send automated reports, for example if you want to have a daily report of your trades and status of the open orders you could buy or create an EA to just do that
- Read news, this may be hard to program but possible. An Expert Advisor could be able to read a news feed and understand events are are happening, so to notify or respond to these events.
- Execute Trades, of course a Trading Robot can execute orders on behalf of you, your system is basically trading unattended
- Modify Orders, an EA can be programmed to modify existing orders and this is quite powerful. Think for example to a trailing stop, you want the stop loss to be moved when the price moves in the direction of you desire, the EA can automatically move the stop loss following this trend
- Stop Trading, you may need to stop all your trading activity and close all of your orders in response to some events, an EA can do this for you while you are not even at your computer, handy isn’t it?!?
As you can see an Expert Advisor can execute many tasks, do not think about it only as a simple software that opens and closes orders. The complexity behind a Trading Robot can vary depending on the tasks programmed and the creator.
You can find some examples of expert advisors in the download section.
Advantages of Trading Automation and Expert Advisors
You now know what is Trading Automation and what is an Expert Advisor. You should also know what tasks you could do with an Expert Advisor. The question you may be asking yourself is, why should I automate my trading? There are several reasons why you would want to use Trading Automation tools:
- Free up your time! This is probably the most important reason why you want to automate your trading activity. We all live busy lives and time has become the most valuable thing you have. Whether you trade part-time or full-time you may want to have more time to do other things instead of trading. Trading Automation allows you to execute tasks without your interaction.
- Execution speed, a computer is much faster than us performing calculation, comparison and execute some tasks. In a fraction of a second an EA can study the price trend of the last few hours or even months, compare with some rules and execute a trade, you would have done the same in minutes or hours.
- Backtesting, a Trading Robot can be tested on historical data. This is such a powerful tool to test a new strategy. Backtesting allows you to see how your strategy and program would have performed in the past so that you can have an idea of how it could perform in the future. With backtesting you can also spot errors and aspects that could be improved.
- Trading 24×7, well not exactly 24×7 as the markets are not always open. You can setup a server that is connected and ready to trade 24 hours a day 7 days a week, this is especially useful with Forex Trading as it is open 24h a day during the week.
- Work around Trading Psychology. One of the most important skills for a trader is discipline. As we all know discipline can be affected by many factors. A Trading Robot cannot be affected by any lack of discipline, an Expert Advisor is discipline by definition. A Trading Robots have set rules to follow and responds only to those rules. Think about an unclear situation and you would like to trade, or think about a trade not going as you expected and you are about to close because of panic, this cannot happen to an Expert Advisor. If the rules are met to open a trade it will just trade, if the rules are met to close a trade then the trade will be closed.
Trading Automation can surely help improving your trading and making more money used correctly.
Disadvantages of Trading Automation
We highlighted the advantages of trading automation however it is also important to understand that this involves risks and limitations. Some of the most important are:
- Errors, if your Expert Advisor contains bugs or errors your funds can be at risk, luckily backtesting and demo accounts can help with this.
- Unexpected events, you can program your EA to respond to many triggers and events however there may be situations that are not expected and in this case your EA may be affected
- Limitation in the programming, we explained how EA can perform technical analysis however it is also true that some interpretations of price actions, charts, prices and trends may be very hard to translate in mathematical functions and comparisons. Improve your skills as a programmer and you will be able to perform more and more tasks.
- Trust in the system, with an EA in fact you must have 100% confidence in the system. A software is potentially trading with your money, always remember to follow rigid rules of risk management with your expert advisors.
Trading Automation surely has some disadvantages but if used properly the advantages outweight the disadvantages.
In this article we introduced Forex Trading Automation and Expert Advisors so that you can understand the opportunity presented by this tool. We examined why you should include Trading Automation in your trading and where to be careful. Use it correctly and it will give you great power.
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