Education

Automated Trading Solutions for Trading Forex

The concept of automated trading is relatively self-explanatory; it’s the principle of using software, often referred to as scripts, algorithms, bots, expert advisors and other phrases, to automatically execute a predefined trading strategy on behalf of a trader. Automated trading solutions are used throughout the entire capital markets secretor, and the practice is used by players at every level. Retail forex traders, hedge funds, asset managers, banks, market makers, crypto traders and futures and options traders all find a use for trading algorithms.

In the past decade, traders from all backgrounds have embraced automated trading solutions to various degrees. The technical and financial barrier related to developing complex auto-trading systems has been decreasing rapidly. We’re now at a point where nearly anyone in the forex trading community has the means to build an algorithm to automate their trading strategy. 

For example, a retail trader with an account size of just a few hundred dollars can learn how to write automated trading scripts from the endless videos in YouTube and tonnes of previously addressed frequently asked questions in the many online trading forums. Once their trading algorithm is developed, they can run it on a trading platform like MetaTrader 4, which is typically provided by forex brokers for free. Retail traders may run the trading application operating their bot continuously on a VPS which may cost in the region of twenty-dollars a month. 

In contrast, a multimillion-dollar prop-trading firm with dozens of developers and analysts may create complex high-frequency proprietary trading algorithms. The firm could deploy the software on hardware that costs as much as several thousand dollars per month to lease in co-location centres such as the Equinix LD5 data centre in London, alongside the trading servers of all major banks and forex market participants. 

In this article, we’ll explore how automated trading became so mainstream in the forex industry, what the advantages of automating a trading strategy are and an overview of what the various automated trading solutions that are highly adopted in the forex community. 

How automated trading became mainstream?

Many of us have MetaQuotes to thank for their role in vastly reducing the barrier of entry to the world of automated trading. In 2005, MetaQuotes, a software developer, released MetaTrader 4, the fourth version of its financial markets trading and charting applications. MT4 introduced numerous sophisticated trading features which helped the platform gain popularity in the forex trading industry.

By 2010, MT4 had become the defacto standard trading platform for brokers providing online forex & CFD trading services. What earned MT4 so much notoriety amongst forex traders was the capabilities for developing automated trading strategies, popularised as Expert Advisors (EAs). MetaTrader 4 offered a proprietary programming language called MetaQuotes Language Version 4 aka MQL4 and an application called MetaEditor for developing the scripts. 

A large community of traders emerged as advocates of MT4. The online forum that hosts the community of MetaTrader users is one of the most visited investing websites in the world.

MT4 is by no means the only trading platform with automated trading capabilities. If you’re in the process of choosing a forex trading platform, make sure to check if the platform you’re considering has algorithmic trading capabilities.

What are the advantages of automated trading solutions? 

Humans are inherently flawed by their biases, limited by their basic needs and unable to process anywhere near as much information as a computer. Just as many other industries have adopted automation to increase productivity, traders have done the same. Here are some of the top reasons why traders automate their trading strategies.

Automated trading systems eliminate human emotions

Forex trading robots eliminate human behaviour from the process of trading. Humans are susceptible to hundreds of biases that cause significant flaws in judgement. One of the most notorious behavioural anomalies traders experience is the disposition effect. The disposition effect is, in essence, the notion that people dislike losing far more than they enjoy losing. 

Translated into the context of trading and risk management, it implies that traders would rather close a position at break-even or with just a couple of pips profit, for the sole purpose of evading a loss. Even worse, some traders find themselves reluctant to close a losing position that results from a failed trade set up, because they hate the idea of losing and hope the market will pivot. If they can close the trade with just a few cents profit, it will still feel like a win, regardless of how much is won.

Similarly, traders who fall victim to the disposition effect often close profitable positions too early because they’re afraid of pullback and the thought of losing if they don’t take decisive action. When you combine the actions of letting unprofitable positions lose excessively and close the profitable positions too early, it’s a recipe for the worst ever risk-reward ratio. 

Traders use automated trading solutions to prevent their emotions from getting the better of them. An automated trading strategy can follow a strict risk-to-reward ratio and will not care how many times it wins or loses, only that it must follow the rules.

Humans can only process a limited amount of information

As the financial markets operate across all timezones, there is never a shortage of opportunities, especially in the forex market. Some traders develop systems that analyse the relationships of multiple currency pairs and even asset classes to determine trends across different timeframes. Other traders incorporate dozens of technical analysis indicators into their systems and wait for a sequence of indicators to line up and generate a signal. Dealing with this much information can be exhausting. 

An automated trading solution can process countless pieces of concurrent information and make split-second decisions twenty-four hours a day, unlike a human who needs regular breaks and many hours of rest. A trading bot can cover much more ground than its human counterpart.

Disregard for market sentiment and fundamentals

As an active trader, you’ll be paying close attention to the current economic and geopolitical news. The constant too and throw of whether there will or won’t be a Brexit deal. Or, positive coverage about positive results from COVID-19 vaccines or negative coverage about rising cases and hard lockdowns in major financial centres like New York and London may influence your attitude to the market. 

The reality is that fundamental news is almost always already priced into the market, and the price reflects sentiment. This is particularly true for the lower timeframes. Trading algorithms can ignore the external sentiment and fundamental details about the market, and focus solely on technicals and price movement. 

A drawback of automated trading systems is not knowing about the economic news events, such as the NFP and similar reports which can influence the market in the short term. It’s possible the bot will not understand the context behind the short term volatility, and it can misinterpret price action. Therefore, many automated trading strategies are programmed to disregard high-impact news announcements. 

How to get started with automated trading?

If you’re interested in getting started with automated trading in the forex market, you’ll be pleased to know there are numerous free to use platforms and resources to get you started. Popular trading platforms such as MetaTrader 4, as mentioned earlier in the article, have all the resources traders need to build EAs and custom indicators. cTrader, another popular forex trading platform offered by Scandinavian Capital Markets, has outstanding capabilities for developing, testing and running cTrader Robots, aka cBots.

Besides having to code your own EA or cBot, other methods of taking advantage of automated trading systems are to automatically copy the trades of other trading strategies in your own account using a popular copy trading service like Myfxbook

For more sophisticated traders, they may choose to build a completely custom trading system which is independent of any trading platform and connect it to various brokers via the FIX API

However you want to automate your trading strategy, we’ll have a solution suitable for you at Scandinavian Capital Markets.