What is Automated Forex Trading: Clever yet Effective Technology
Why Forex trading?
This is probably one of the questions that you need a reasonable answer. There are hundreds of investments out there that you can prefer, but why go trading foreign currencies instead?
Forex investment is unique in various aspects.
Its trading volume is relatively huge compared to other market.It has extreme liquidity or the capability of either buying or selling the currency without causing significant movement in the market price. It has the largest number and variety of traders.
It is one of the markets that have long trading hours (24 hours each day, except during weekends.Trading locations are almost everywhere, not just in the United States or major cities of Europe.There are different factors that affect foreign exchange rate.
Another whooping fact that will make you excited to go on Forex trading: it has an average turnover in traditional foreign exchange market of around $1.88 trillion daily, according to the Triennial Central Bank Survey of the BIS (Bank for International Settlements). Here are the daily averages of turnover on the Forex market for the last 17 years:
$500 billion (April 1989)
$750 billion (April 1992)
$1.18 trillion (April 1995)
$1.48 trillion (April 1998)
$1.16 trillion (April 2001)
$1.88 trillion (April 2004)
From the figures alone, you will notice that the average trend of Forex turnover is increasing. It is estimated to reach as high as 2 to 3 trillion dollars within the next 8 to 10 years, if the number of traders around the world will continue to increase. As a matter of fact, everyone have the chance of getting a substantial slice of the Forex market wealth pie, especially that the Forex trading marketing is now on its automation process.
How Automated Forex Trading Works
Foreign exchange (forex) trading has become incredibly popular in recent years thanks to the ubiquity of online trading platforms and the 24-hour nature of the market. While many institutional investors rely on algorithmic trading, retail traders have only recently been able to harness the power of automated forex trading systems.
MetaTrader, TradeStation, and other applications have made it easy to write simple computer programs based on technical analysis rules. Advanced traders may also create their own trading systems in programming languages like Python or R.
For example, a trader may write a program that places a buy order for a currency pair when the 50-day moving average crosses above the 200-day moving average and places a sell order when the pair moves 50 pips higher. Many forex brokers let traders automatically run these programs to execute trades.
Pros and Cons of Automated Forex Trading
There are pros and cons to using automated forex trading systems rather than placing trades manually.
The biggest advantage of forex trading systems is that they take the emotion out of the process, which tends to reduce the behavioral finance biases that negatively impact investment decision making. Traders can also backtest a trading system to see how they perform based on past data, which can help them fine-tune their strategies before using real capital. And, of course, traders don’t need to be present to generate profits from these systems.
The downside is that successful automated forex trading systems can be difficult to develop. While backtesting may show positive results, past performance is never a guarantee of future results and many trading systems are over optimized—or curve fitting—for past results. Traders should exercise caution when buying “off the shelf” automated forex trading systems since they may be curve fit to the past and offer no or limited benefits for the future.
Using Automated Forex Trading Systems
Automated forex trading systems are a great way to get started in the world of quantitative finance. MetaTrader and other applications are free to use on demo accounts, which means that they can be a valuable way to practice building systems, backtesting them, and applying the concepts in practice by paper trading.
The best place to start is implementing techniques in a programmatic manner that you’re already using in live trading. For example, you may want breakouts from a prior reaction high, which is a concept that can be represented by scripting in languages like MQL. Traders may also use other platforms and scripting languages like TradeStation’s EasyLanguage or programming languages like Python and R.
It’s important to practice trading before committing real capital and to keep an eye on automated systems to ensure that they’re performing correctly. In addition, traders should be sure to build in money management and risk tolerance strategies to limit downside in the event that unexpected price action occurs—such as whipsaws.
Through automated process, transactions can now be done in real time. Although manual systems have existed for quite some time now, it is difficult to achieve such benefit that the automated Forex system can offer to its traders. All of the trades can happen within a few milliseconds and can be a big plus for automated transactions against the manual system. In fact, there are problems that are addressed using automated Forex trading especially if the trader is losing a few times in a row that prevents him from making new trades. Such problem could be addressed using the automatic trading system.
With automated Forex trading, you will have a greater diversification. It means that you can trade in various markets in different time zones at a time. You can execute trades with traders from Singapore or London even it is already 12 midnight in the United States. This benefit allows you a multiple exchange model option. You can use varying trading models to evaluate short-term data. This means that you will be able to predict the trend for a shorter period of time, let us say from fifteen minutes to half an hour.
As previously mentioned, the Forex market is unique because of its extreme liquidity. This liquidity is increased when the market goes automated.
Risk management problems are solved through automated Forex trading. International checks, which are commonly used in making purchases on Forex market, are synchronized through automated technology. Since the transaction in an automated process is now on real time, there is a slim chance that the payments will be delayed, reducing the risk of non-payment by either parties. Although there are problems noted with the use of the automated system, it can be fixed through consistently-updated technologies.
With automated Forex trading market, the prediction of $2-3 trillion average daily turnover within the nest 8 to 10 years can be changed within the next 4 to 5 years. Given the quick yet efficient trades on varying time zones, automated Forex trading will now be among the existing lucrative business around the world.