Automated Forex Trading is a method of trading foreign currencies with a computer program that is based on a set of analyses that helps determine whether to buy or sell a currency pair at any one time. Automated forex trading uses a computer program that the trader “teaches” to make decisions based on a set of signals derived from technical analysis charting tools. The signals create a buy or sell decision when they point in the same direction. Most FX traders use MetaTrader platform for automated trading with Expert Advisors and scripts. More sophisticated traders use proprietary trading programs that mostly have a direct FIX (API) connection to and exchange or ECN. Most popular Expert Advisors are Forex Thor II, Million Dollar Pips (MDP), Shark 7, Forex Envy, SuperScalper NMI, Forex Gold Machine, Smart Hunk, Megadroid, Winnetou, Forex Treasure, TheSpecialOne, Ilan, Ilan Dynamic, Martingale. Ultra-fast connection is required to run most of these trading robots (ping of 1-2 ms is a must).
It is easy to explain automated trading. In an automated forex trading system or computer-assisted trading, the trader must teach the software what signals to look for and how to interpret them. It is thought that automated trading takes human psychology out of trading. Automated day trading systems and signals are available to purchase over the internet. However, it is important to note that there is no such thing as the “holy grail” of trading systems. If the system was a perfect money maker, the seller would not want to share it. This is why big financial firms like Goldman Sachs and others keep their “black box” trading programs under lock and key.
Forex autotrading is a trading strategy where buy and sell orders are placed automatically based on an underlying system or program on the foreign exchange market. The buy or sell orders are sent out to be executed in the market when a certain set of criteria is met. Autotrading systems, or programs to form buy and sell forex signals, are used typically by active traders who enter and exit positions more frequently than the average investor (sometimes within 1 second). The autotrading criteria differ greatly, however they are mostly based on technical analysis. Scalping is one of the most popular trading strategies. Latency arbitrage is another.
History of Automated Trading
Forex autotrading originates at the emergence of online retail trading, since about 1999 when internet-based companies created retail forex platforms that provide a quick way for individuals to buy and sell on the forex spot market. Nevertheless, larger retail traders could autotrade Forex contracts at the Chicago Mercantile Exchange as early as in the 1970s.
Two Major Types of Automated Forex Trading
Fully Automated or Robotic Forex Trading
This is very similar to algorithmic trading or black-box trading, where a computer algorithm decides on aspects of the order such as the timing, price or quantity and initiates the order automatically. Users can only interfere by tweaking the technical parameters of the program; all other control is handed over to the program.
Signal-based Forex Trading
This autotrading mode is based on manually executing orders generated by a trading system. For example a typical approach is to use a service where traders all over the world making their strategies available to anyone interested in the form of signals. Traders may choose to manually execute any of these signals in their own broker accounts.
An automated trading environment can generate more trades per market than a human trader can handle and can replicate its actions across multiple markets and time frames. An automated system is also unaffected by the psychological swings that human traders are prey to. This is particularly relevant when trading with a mechanical model, which is typically developed on the assumption that all the trade entries flagged will actually be taken in real time trading.
Forex Signal Provider based models offer traders the opportunity to follow previously successful signal providers or strategies with the hope that the advice they offer will continue to be accurate and lead to profitable future trades. Traders do not need to have expert knowledge or ability to define their own strategies and instead can select a system based on its performance to date, making Forex trading accessible to a large number of people.
Edited by Ingmar Mattus