How Do Forex Trading Robots Work?

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Compared to other investment instruments, forex trading has become widely popular in the past decade with lower barriers to entry and high potential returns on investment from relatively small amounts of capital. 

A key mechanism that facilitates forex trading l is trading robots, which is the topic of today’s discussion.

What is a trading robot?

Trading robots are essentially software programs that are installed into a trading platform to automatically execute trades at any time of the day. These robots can be programmed to open trades, manage trades, take profit, and close positions, with some traders utilising them to perform all of their tradings.

Trading robots, which are sometimes referred to as expert advisors (EAs) for MetaTrader software users, are essentially algorithmic programs coded to execute on specific conditions according to a trading strategy.

Types of trading robots

  • Semi-automated trading
  • Fully automated trading bots
  • Monitoring bots
  • Multi-user bots
  • Social trading bots 

Advantages of using trading robots

For the most part, financial trading instruments are fraught with substantial risk, and forex trading is no different.

Trading robots may be employed to help reduce the inherent risk in forex trading by:

  • Keeping to a set of fixed trade setup parameters even if not easily visible.
  • Closing trades according to set parameters instead of holding onto deteriorating trades.
  • Avoiding emotional decisions when experiencing a few losses in a row.
  • Taking profit in a disciplined manner

Simply put, trading robots are reliable and stick to the trading plan. The key advantages offered by robots over manual trading are:

  • Less human errors 
  • 除去人在交易上本性的高兴和悲伤,更理智的面对市场
  • No subjectivity 
  • Statistically driven 
  • Faster execution speeds once operational 
  • Easy diversification and management of strategies. 
trading robots are reliable
Image by Gerd Altmann from Pixabay

Disadvantages of trading robots

  • Trading robots are typically programmed to work within specific market conditions. Market conditions are ever-changing, and most forex robots will need to be switched on or off at discretion, as well as repeatedly updated to keep up with the prevailing conditions, requiring constant effort from both the trader and the developer. 
  • End of day, codes are designed by human and not knowing what we do not know is inherited in every trading systems.
  • Different currency pairs exhibit different behaviour, and thus require different ways of approaching the market. This means that a trading robot might only work for a particular set of currency pairs, and not for others, requiring further customization by the trader and developer. 

How do forex trading robots work?

Trading robots can be coded with common programming languages such as Python or C++ and some of them like Expert Advisors are operated within forex trading software platforms such as Metatrader

Developers can create algorithms that decide when trades are opened or closed, stop-loss and take-profit levels, and other rules into the trading robots, which are largely based on repetitive, technical analysis-based observations. 

Typically, trading robots should only be utilised during specific market conditions for which the robot is programmed, and extra monitoring would be required during market disruptions or important macroeconomic data releases which may impact the prevailing market dynamics.. 

Knowing the exact market conditions during which your trading robot returns the best results is imperative, so you can use them only in times when their profitability is highest. 

Processes involved in creating forex trading robots

Software Programming 

Trading robots are algorithms constructed through computer programming. With a strategy in mind, the trading conditions can be built to be detected and acted on by the algorithm. Studying how existing technical trading rules are put into code can help with the development of such a tool. 

Testing phase 

After the first version of your trading robot has been programmed, it needs to be tested to demonstrate proof-of-concept. The testing phase is divided into two phases: software testing and market testing. 

Software testing is usually performed in a beta testing phase where a few traders are selected to try and utilise the forex robots and report any bugs, errors or faults found. Market testing will be executed via backtesting with historical data from the forex market and forward testing, which is a simulation of actual trading following the system’s logic in a live market. Along the way, the algorithm is improved and fine-tuned to deal with previously unforeseen issues.

Backtesting 

In this form of testing, forex trading robots are tested to trade within the market based on historical data. Backtesting enables traders to see whether the forex trading robot is following the precise rules it was coded to execute and the viability of the strategy. 

To ensure the integrity and validity of backtesting, forex robots typically go through a test of a minimum of 6 months of historical market data. 

It is crucial to have complete and accurate historical data to ensure that backtesting results are optimal. Overall, in backtesting, you can obtain some vital results such as: 

  • Total net profit
  • Profit factor: This is the ratio of gross profit to loss. In practice, a higher profit factor can mean better performance. Therefore, it is crucial to set a profit factor benchmark to align it with the research objectives. 
  • Absolute drawdown: this reflects the likelihood that an account will be blown out. 
  • Modelling quality – this result revolves around ascertaining model accuracy against single price fluctuations.

Forward Testing 

Although results generated from backtesting can be a good indication of a trading robot’s success, the differentiating factor of a forex trading robot from others is whether it can accomplish profitability in real and current markets. 

This is substantiated through forward testing, which puts a forex trading robot through extensive testing in a live market situation, especially where the market is volatile. This exercise conducted in live market situations tests how the trading robot reacts to rapid price fluctuations and movements. As the last testing phase, forward testing determines whether the trading robot has managed to achieve its objectives.

When to use a trading robot?

When to use a trading robot
Image by Sergei Tokmakov Terms.Law from Pixabay

For traders who are unable to continuously watch and monitor the forex markets, the use of trading robots can be an attractive option. However, traders should bear in the mind two vital points: 

  • To spend a significant amount of time finding and evaluating trading robots that actually work, and have reliable testing results. There are numerous trading robot products being offered in the market and not all of them are suitable or sound strategies.
  • It is important to continuously monitor how the robot reacts to the market given market conditions are ever-changing. Human intervention and adjustments are required to ensure that the robot is working well under the prevailing market conditions. 

Things to consider when choosing your forex robot

When considering which forex robot to select, traders should watch out for the following points: :

  • Always look for a low drawdown rate (the measure of decline and reduction of capital). Though high drawdowns may lead to higher gains, they can also cause a trading account to incur great losses that might wipe out the initial trading capital.
  • The best trading robots are usually thoroughly tested against real data, variable spreads, and varying market conditions. Remember, trading robots should always be backtested against historical data to show where the robot is struggling to predict trends and where they perform well.
  • Always be wary of product reviews from unverified sources. Watch out for trading robot products that claim huge profits and are unable to provide real-time examples of how they are performing. 
  • Test with a demo account in a test environment before deciding to employ a trading robot in live market conditions. 
  • A lot of robots will fail in actual live trading conditions, due to transaction costs, slippages, volatile pricing and execution latency issues, that might not be fully captured in a demo trading environment.
  • Note that a trading robot will produce different profits and losses on different brokerage execution platforms given FX is a OTC market where all the brokers offer different pricing. A winning robot might be a losing one on another brokerage platform.
  • Ensure that all trading robots are constantly monitored and under supervision.
  • Remember that there are no guarantees of profit as the market can be volatile, even when using the most sophisticated robots.

Final Remarks

In conclusion, forex trading robots can do things that a human cannot do, as they can be programmed to monitor multiple currency pairs simultaneously, and execute trades based on specific algorithms. and are not influenced by emotions the same way humans are. However, trading robots could make errors or be ineffective when there are unexpected changes in the market. 

The most important benefit from using trading robots is the ability to customise settings that will allow an algorithm to make decisions according to one’s chosen strategy and should be used in conjunction with the trader’s own trading intelligence and guidance. 

For more information on forex, reach us at Ortega Capital.

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