Why has automated trading software become so popular?
What is automated trading?
Automated trading or algorithmic trading refers mainly to a program developed within the trading platform in order to automate trading strategies. Expert Advisors or EAs, for instance, can monitor the currency pairs or other assets you are interested in and notify you as soon as there is an opportunity for a favorable trade. However, you also have the trading robots which not only inform you of opportunities but trade them automatically on your behalf as well.
These trading robots aren’t sentient of course, but depending on the skill of the programmer, they can be extremely successful. The conditions on which a trading robot will open or exit a position are predetermined in the code but usually there are a lot of parameters which you can modify to suit your preferences. Most of the time you can choose which assets the robot will trade, the maximum risk you are willing to bear and the time of day the robot will be active.
As you can imagine, this is an extremely convenient proposition for those who are interested in investing in retail trading, but don’t yet have the experience to actually trade profitably. Seasoned traders also seem to be adopting automated trading as well, because of how they can automate their strategy or at least some part of it, or even have the trading robot identify opportunities in markets which they don’t usually watch.
If you are interested in trying out an EA or trading robot, however, it’s best to steer clear of dodgy third-party services and first get in touch with your broker for further information. If your broker supports the MT4 trading platform, you can find several automated trading software available for sale in the built-in market, but keep in mind that performance is never guaranteed.
This is why most experienced traders who make use of automated forex trading solutions prefer to have a programmer develop a robot based on their own strategy and indicators.
The benefits of automated trading
The forex market is huge, both in trading volume and tradable assets. As such, a program that never sleeps and can track the performance of thousands of assets simultaneously, has a substantial advantage over a human trader – at least in theory.
Here’s a list of the pros of automated trading:
Since trading robots and EAs are mostly targeted towards traders who aren’t experienced enough to trade themselves, they are developed with ease-of-use in mind. They more sophisticated software will probably come at a price to match the high quality of performance, but there are several available for free as well.
The best part is that you don’t need to risk your deposit to see if they can deliver as promised. In fact, it’s a common rule of thumb to first test out new indicators and trading robots on a demo account with virtual money, to ensure that everything works as it should.
- Unemotional trading
Trading with your hard-earned capital is sometimes a nerve-wracking experience. Emotions like fear and greed get in the way and can substantially hinder your trades. Many traders give up because of the stress involved and others can’t handle having their assumptions rejected by the market and stay in losing positions much longer than they should – further increasing their losses.
A trading robot, however, doesn’t hope that a losing trade will eventually turn around and become profitable or that there is some more profit to be squeezed out of a winning position. As soon as it starts moving dangerously into the red or as soon as the target profit is reached, it will automatically close the position to minimize your losses or secure your profits respectively. The percentage you are willing to risk, and your profit targets can be modified to suit your risk appetite as well.
Having a clearly defined trading plan and sticking to the rules laid out by said trading plan is crucial to your success as a trader. This is why automated trading is so advantageous for traders who sometimes let their emotions dictate when and how they trade. The trading robot may only trade based on certain rules and conditions and will never overtrade to recover a day’s losses.
- Faster entries
Every forex trader who has been in the market for some time knows first-hand how important order entry is. The markets can move rapidly at times and this is why timing is key to a profitable trade.
Trading robots can react to signals and open and close hundreds of trades in mere seconds. This level of performance can’t be matched by a human trader and it can be the difference between realizing considerable gains or sustaining equally substantial losses.
The swift reaction time of a trading robot can help monitor hundreds of currency pairs and commodities to find opportunities that most of the time go by unnoticed by the majority of traders. In fact, most traders will only focus on a handful of markets because they naturally tend to find it easier to trade the assets they are more experienced with and can more easily predict their intraday price movements.
On the other hand, a trading robot can scan all tradable assets available and trade any upcoming opportunities automatically – substantially increasing your profit potential through diversification.
The cons of automated forex trading
While automated trading does offer incredible benefits, there are also some caveats and pitfalls that traders need to keep in mind.
The truth of the matter is that market environment changes all the time and an automated trading solution will not always provide consistent results. Most strategies aren’t relevant or viable 100% of the time and therefore, you should know that a trading robot needs to be constantly updated according to the current market conditions.
Some automated trading solutions are, of course, more sophisticated and there is some flexibility in their built-in strategies, but in general it’s best to inquire whether the programmer will be able to provide regular updates to the software in order to improve its accuracy and consistency over time.
Also, a trading robot relies heavily on a stable internet connection. If your connectivity is spotty, you are likely to be disappointed by the performance of your trading robot as it will probably be lagging behind and not opening/closing positions on time or at all. Therefore, if you are having technical issues with your internet or your computer in general, it’s quite likely that having a trading robot do your trading may not be the ideal solution for you.
In cases where such difficulties arise, you can look into copy trading or mirror trading which is essentially another form of automated trading, but instead of a robot doing your trading for you, you are essentially hiring an experienced trader to do it or you can just copy all his trades directly.
Usually referred to as social trading due to the community aspect, copy trading is also becoming quite popular among beginner traders. It provides a unique opportunity for beginners to the industry to learn from experts with years of experience and benefit from their strategy.