We live in an era when computers assist humans with many tasks. Many aspects of our daily life involve the use of technology, and this has expanded to trading as well. In this guide, you are going to learn what Forex trading automation is. You will also see what a Forex expert advisor (also called trading robot) is.
Some History of Trading Automation
It all started with the invention of computers in the 20th century. First, programmed to assist in mathematical calculation, since then, information technology evolved making computers more powerful, complex, faster, and allowing the world to connect through the Internet. It didn't take long for banks, institutions, and people to understand that technology could help in trading and making more money.
The first systems to be created were charting and trading software. They helped facilitating the study of prices and execution of orders. They eventually became real trading platforms, complete software to make a trader's job easier.
Forex Trading Automation
What exactly is Forex trading automation? It would be better to first define trading automation in general. Trading automation is a trading activity which is totally or partially executed by software. Forex trading automation is the trading automation applied to the Forex market. In other words, with trading automation all or some of the trading tasks are performed for you by software running on a computer system.
There are several ways to automate trading activity. The main ones are:
- Trading signals — services that you can subscribe to, so that your software receives the trades executed by another system and can copies them. There are free trading signals options available, but the majority of profitable ones are commercial.
- Social trading — very similar to trading signals, but it is based on a social platform. In a social platform, traders can share their trades and can be followed and copied by other traders.
- Expert advisor — a piece of software programmed to execute actions in response to specific triggers. You can buy commercial expert advisors, download free ones, or create your own.
As you will see later in this article, trading automation has many advantages and some disadvantages. Some people may find great benefit in it but perhaps it is not for everyone.
What Is Expert Advisor?
An expert advisor is a piece of software that executes trading tasks on behalf of the trader. An expert advisor is basically a program that you can get somewhere or create yourself. Expert advisors are also known by names like trading robots, black boxes, and in short form — EA.
Expert advisors are often associated with algorithmic trading, which is a type of trading that is based on technical analysis, mathematical models, and statistics. Expert advisors are in fact ideal to execute tasks responding to clearly defined triggers. In algorithmic trading, the triggers are determined by the rules applied to the values resulting from the technical analysis performed on prices. For example, a rule can be a technical indicator reaching a determined threshold — if the condition is met, an order is triggered.
Some trading platforms allow you to install third-party expert advisors and some also allow you to program your own expert advisors. The best platform for this right now is MetaTrader 4.
Examples of Trading Automation
Now that you have some understanding of what an expert advisor is, it would be useful to see some examples of the tasks that can be performed by an expert advisor. It is a common opinion that expert advisors only execute trades, but this is incorrect — executing the trades is only a part of trading automation, and you can see it in the following examples. So, what can you do with a trading robot?
- Perform technical analysis — with an EA, you can study patterns, execute automatic calculation using prices and other mathematical functions. All these calculations are meant to understand and forecast the trend of the price.
- Send notifications — you can program an EA so that you are notified about price changes or events happening. The notifications can be triggered by technical analysis, scheduled by time, or even issued based on other events.
- Create and send reports — an EA can create and send automated reports. For example, if you want to have a daily report of your trades and status of the open orders, you could find or create an EA to do just that.
- Read news — this may be difficult to program but it is possible. An expert advisor could be made to read a news feed and understand events that are happening to notify you about them or respond to these events.
- Execute trades — of course, a trading robot can execute orders on behalf of you. Your system is basically trading unattended.
- Modify orders — an EA can be programmed to modify existing orders and this can be quite powerful. Think, for example, about a trailing stop — you want the stop-loss to be moved when the price moves in the direction of your trade; the EA can automatically move the stop-loss by following the trend.
- Disable trading — you may need to stop all your trading activity and close all of your orders in response to some events. An EA can do this for you while you are not even at your computer. This can save you money and stress.
As you can see, an expert advisor can do a lot of stuff. Do not think about it only as a simple piece of software that opens and closes orders. The complexity behind a trading robot can vary depending on the tasks programmed by its creator.
If you want to save hours of research and coding and if you want to see some professional code, you can have a look at our MT4 Expert Advisor Template. You can even use it to build your own EA!
Advantages of Trading Automation and Expert Advisors
You now know what trading automation and an expert advisor are. You also know what tasks you could perform with an expert advisor. The question you may be asking yourself is, why should I automate my trading? There are several reasons why you would want to use trading automation tools:
- Free up your time — this is probably the most important reason why you would want to automate your trading activity. We all live busy lives, and time has become the most valuable thing you have. Whether you trade part-time or full-time, you may want to have more time to do other things instead of sitting in front of your computer doing routine analysis or trade execution stuff. Trading automation allows you to perform such tasks without your interaction.
- Execution speed — a computer is much faster than us at performing calculation, comparison, and executing some tasks. In a fraction of a second, an EA can study the price trend of the last few hours or even months, compare it with some rules and execute a trade. A human trader would require minutes or hours to do the same.
- Backtesting, a Trading Robot can be tested on historical data. This is such a powerful tool to test a new strategy. Backtesting allows you to see how your strategy and program would have performed in the past so that you can have an idea of how it could perform in the future. With backtesting you can also spot errors and aspects that could be improved.
- Trading 24x7 — well, not exactly 24x7 as the markets are not always open. You can setup a server that is connected and ready to trade 24 hours a day 7 days a week. This is especially useful with Forex trading as it is open 24h a day during the week.
- Circumvent trading psychology — one of the most important skills for a trader is discipline. As we all know, discipline can be affected by many factors. A trading robot cannot be affected by the lack of discipline. An expert advisor is disciplined by definition. A trading robot has set rules to follow and responds only to those rules. Think about trading in an unclear situation or panicking when a trade isn't going as you expected — an expert advisor handles such situations easily. If the rules are met to open a trade, it will just trade; if the rules are met to close a trade, then the trade will be closed.
Trading automation can surely help improving your trading and making more money if used correctly.
Disadvantages of Trading Automation
We highlighted the advantages of trading automation, but it is also important to understand that this involves risks and limitations. Some of the most important are:
- Errors — if your expert advisor contains bugs or errors, your funds can be at risk. Luckily backtesting and demo accounts can help with this.
- Unexpected events — you can program your EA to respond to many triggers and events, however, there could be situations that aren't expected, and in this case, your EA may be affected.
- Limitation in programming — as explained above, an EA can perform technical analysis, however, it is also true that some interpretations of price action, charts, prices, and trends can be very difficult to translate into mathematical language of functions and comparisons. Improve your skills as a programmer and you will be able to program your EA to perform more and more tasks!
- Trust in the system — with an EA, you must have 100% confidence in the system. Don't forget that this software is trading with your money. Always remember to follow rigid rules of risk management with your expert advisors.
Trading Automation surely has some disadvantages, but if used properly, the advantages outweigh the disadvantages.
In this guide, we introduced Forex trading automation and expert advisors, so that you could understand the opportunity presented by this tool. We examined why you should include trading automation in your trading tool set and where to be careful. Use it correctly and it will give you great power!
You can download some of our ready-made expert advisors to try them out and to see how they work. Being open-source, they can serve as learning material for your study of trading automation.
If you want to get news of the most recent updates to our guides or anything else related to Forex trading, you can subscribe to our monthly newsletter.