A forex trading robot is an automated computer programme which generates trading signals, places orders and manages positions for forex traders. The trading signals generated determine opportunities to open or close positions. The trade is then executed automatically or in the case of semi-automated robots, authorised manually by the trader.
Forex trading robots can be purchased online from independent developers and they’re generally inexpensive. They’re useful in that they remove the emotional pressure of forex trading but they are not foolproof; they have their limitations and should be used with caution.
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FAQS ABOUT FOREX TRADING ROBOTS
What is a forex trading robot?
A forex trading robot is an automated computer programme that monitors the foreign exchange (forex) market and generates signals that identify trading opportunities. The forex market is the most liquid market in the world and trades 24 hours a day/5 days a week. Forex trading robots allow retail traders access to the market even when they are not available (sleeping or working).
There are two types of traders; those who manually trade and those that use automated trading tools. Trading robots are created for the latter. There are also two types of trading robots; automated and semi-automated robots. The latter allows for human intervention where the final decision to trade on a position is in the control of the trader.
What is the difference between a trading robot and an EA?
The term forex trading robot and Expert Advisor (EA) are used interchangeably. EAs are more commonly associated with MetaTrader which is one of the most popular trading platforms in the world. EAs for MT4 and MT5 are all completely unique to the platform.
By definition, forex trading robots and EAs are pieces of software that are programmed to automatically trade on a forex trader’s behalf within pre-determined parameters. The automated method of trading is also called black box trading.
EAs are widely used in the forex market and are a strong selling point of trading platforms such as MT4 and MT5. Some traders exclusively use EAs while others do manual trading and deploy EAs on other trading accounts as part of a diversification strategy.
EAs are built into MT4 and MT5 using the MQL4 and MQL5 programming languages. The programme includes technical indicators and scripts for the MetaTrader platforms and is supported by MetaQuotes. A large community of developers share their EAs on trading forums.
Are there different types of trading robots?
There are two types of forex trading robots:
These robots do everything for a trader. Once you open them up, they enter and close trades at any time in the trading day according to the parameters you set.
These robots do everything up to opening and closing a trade. They generate trading signals and identify trading patterns. It’s up to you whether or not you authorise the trade.
How does a forex trading robot work?
A trading robot is programmed to rapidly scan price movements, determine trading patterns and identify whether an opportunity exists to buy or sell a currency pair at a given point in time. Fully-automated trading robots execute the trade without human intervention based on a pre-determined set of criteria.
Trading signals are implanted in the software programme and the robot automatically determines when it is the right time to trade. They are popular because they remove the need for human intervention and eliminate emotional responses to changes in trading conditions. Simply put; traders panic, robots don’t.
They’re also popular because they are capable of scanning multiple charts in nano-seconds which would be impossible for humans to do. The trading robots find profitable trades even in volatile market conditions. They follow the trend that is most likely to generate good profits and they eliminate any chance of potential losses.
Where trading robots are limited is they are programmed to trade within a certain range. They are set to achieve pip targets in a tight range and hopefully make profits in each trade. When a breakout occurs unexpectedly, small profits made during the day are often wiped out.
Trading robots generally gain a profit in a positive trend but tend to lose money in more volatile trading conditions. This is why semi-automatic trading robots are more popular because it allows for human intervention to set a stop-loss.
What is the difference between a trading robot and an indicator?
Trading robots are used for automated trading and indicators are used for technical market analysis and to boost trading efficiency when trading manually.
Trading robots analyse currency prices in rapid time and do performance calculations almost instantly without any human involvement. They do it tirelessly and objectively, without emotion that humans often experience. The end result is trading robots determine trade entry and exit points, often more precisely than humans.
Indicators are the most important tool for technical analysis. A trading platform like MetaTrader 4 is equipped with an impressive set of popular technical indicators that satisfy the most advanced analytical demands of modern forex traders.
Technical indicator signals help forex traders make informed decisions on how and when to trade. They use a mathematical transformation of a financial symbol price aimed a forecasting future price changes. In other words, indicators pick up cues from historic data to predict future price movements. This is done by identifying characteristics and patterns in price dynamics that your average human trader might not pick up.
What are the pros and cons of forex trading robots?
The main advantage of forex trading robots is they can crunch a lot of data in a short period of time. What a trading robot can analyse in a fraction of a second would take a human a few hours.
Trading robots show no emotion towards price movements; the entire process is automated. The only time a trader intervenes is when using a semi-automatic forex robot.
Forex trading robots do not sleep; they work 24-hours a day/5 days a week. Basically, if the forex market is open, trading robots are working.
Trading robots multi-task at a level no human is capable of which is why many traders use them. They automatically manage multiple conditions, including entry and exit points, stop-loss orders and profit targets. Trading robots can also monitor multiple currency pairs at the same time.
Backtesting trading strategies against historical data is also a lot easier with trading robots. It’s a complex and time-consuming process when done manually. Trading robots can download, store and analyse large amounts of historical data which a forex trader can use to measure the effectiveness of different trading strategies.
The disadvantage of forex trading robots is they are merely tools and they can’t think for themselves. They perform trades based on trading signals that are generated through algorithm coding. They can’t respond to breaking news or shifting market sentiment.
This limitation makes trading robots poor for fundamental analysis. They’re good for only technical analysis which involves perusing historical market data and price charts.
Check carefully when buying a trading robot online. Most trading robots mimic scalpers. A scalping trading strategy involves holding currency pairs for a short period of time to make numerous small profits. Scalpers take advantage of small price movements that occur throughout the day by opening and closing multiple positions in a 24-hour period. The aims is to make small gains of between 5 to 20 pips per trade.
There are good forex trading robots on the market and some dodgy ones. Beware robot scams, it’s a money-making racket for some developers.
Beware of reporting bias. Some robot developers promise unsuspecting new traders the world by showing profit-making backtesting results on their websites. However, these results are often skewed through curve-fitting and data-mining bias. Often, forex trading robots look good ‘on paper’ because the developers have cherry picked only the best backtests.
You need a strong and reliable connection to the Internet. Power faults or outages can cause glitches in the programme and prompt the trading robot to trade incorrectly, such as miss an entry or exit point.
Do forex trading robots make profits?
Forex trading robots that are successful do not focus on high win rates. Rather, they focus on position sizing and cutting losses quickly. They can and do make marginal profits for forex traders but they are not fool-proof.
If you are in doubt as to the claims made by the robot creators, you can verify their validity by backtesting. This is a common feature found on MT4. Bear in mind, even those trading robots that have a proven track record are not guaranteed to deliver you profits. Always trade forex with caution and be responsible with how much money you commit to trading.
Who uses forex trading robots?
Forex trading robots are popular among retail traders, particularly those that are beginner traders starting off with a demo account or those who have full-time jobs and don’t have the time to dedicate long hours to analysing technical charts.
Once you switch over to a real live account, it’s recommended that you use a semi-automated trading robot. This means you’re not handing over the entire responsibility of your trades and money to a machine. You make the ultimate decision to open or close a position which is guided by your knowledge and a fine-tuned trading strategy.
Successful forex traders rely on knowledge and expertise to know when to trade or not to trade. They don’t rely on computer algorithms because they’re proven to be unreliable. They also know that there are no short cuts to successful forex trading. The forex market changes constantly; you need to be tuned into the reason behind changes and adapted accordingly.
How can you develop your own trading robot?
Many forex traders develop their own trading robots or EAs. They’re useful to validate trading strategies and they save loads of time endlessly analysing charts.
All you need is a basic knowledge of MQL5 coding. If coding isn’t in your repertoire of expertise, you can hire a coder to develop a personalised trading robot for yourself. Platforms such as Freelancer.com and Upwork.com are a valuable resource to find coders.
Trading foreign exchange on margin carries a high level of risk and it may not be suitable for all traders and investors. Forex is a highly leveraged financial instrument and these high stakes can result in you losing money. Consider your appetite for risk before trading forex using a real live account.