Comparison with manual trading – advantaged and disadvantages

While automated trading does offer a lot of advantages, old-fashioned manual trading is still not thrown out of the window completely. Sometime in the future, who knows, that may happen as well.

Making the right trading decisions consistently requires gathering a lot of information and then processing that information with the trader’s knowledge and through his skills.

Forex managed account

In this regard, a lot of technical trading systems will have a period when they perform very well and then after some time, the system will hit a period of drawdown which is basically a series of losing trades. In some cases, the system may not at all return to profitability. This is one of the bigger problems with pure technical systems both manual and automated.

Usually, the way professional traders do it is they will analyze the underlying factors like fundamentals and the geopolitical situation of a country or currency, and then they will base their investment decisions on the conclusions of this analysis. Institutional traders usually use technical analysis only to find good price levels at which to buy or sell a currency pair and not to decide the long-term direction it will move in.

When appropriate they will take full advantage of automated trading to further enhance their profits.

Automated trading really shines in very short-term trading where anyway the trader will need to make fast decisions based on a few indicators. The difference is the human trader will be under huge psychological pressure and executing everything well can be difficult while on the other hand the trading robot has no problem in executing every step of the trading plan.

For example, we all know that a human has limited resources when it comes to the number of things we can keep in our head at any one time, and monitoring a lot of trading indicators and different markets at the same time is impossible to be done perfectly. An automated system takes care of all that and it will monitor as many indicators and markets as it was programmed to.

Keep in mind, though, that doesn’t mean that the robot should not be monitored regularly. In fact, it is even better if the trader has a thorough understanding of the foreign exchange market and knows his trading system well, so he can get maximum benefits from using an automated trading robot.
In essence, an automated trading system will tend to do better than manual trading in pure technical systems for short term sentiment driven moves. However for the longer term trends in currencies where fundamentals are a big factor, a human being needs to process all the information and make a prudent decision based on it.

Who uses automated trading in Forex and why?

Automated trading in the foreign exchange market is used by different types of traders, ranging from financial professionals to ordinary people who trade Forex as an additional source of income. Of course, all are using it to make profits from the price swings in the market and do so in a more efficient way.

Institutions and big investment firms use automated trading in diverse ways for different goals like speculation, order execution and arbitrage, which is a simultaneous buying of a currency pair at a lower price, and selling that pair at a higher price, thus profiting on the difference in a matter of seconds.
The world is getting rapidly digitalized and trading is no different. Automated trading is becoming more and more popular in the foreign exchange market, even for investment institutions like banks, mutual funds, hedge funds etc.

Automated trading, also known algorithmic trading, is getting more and more trust from fund managers to make them money as more and more capital gets assigned to such automatic systems. They are perfect executors and with minimal guidance can be very profitable.

For someone who uses a pure technical trading strategy getting a robot to do the job might be just the right thing. In big trading firms, instead of having a whole team of traders 1 person can monitor the robot and instruct it to trade as he wants with much less time and much less guidance.

A lot of the times, because they have huge orders, investment banks will want to divide their orders into smaller chunks in order for the execution to go more smoothly. If they execute the whole order at once a big spike in the market can occur.

So, they use automated trading for this purpose as well, because the robot can make a lot of trades in a very short period of time. By doings so it enables them to enter the market at the best possible prices available.

The retail trader usually wants to make money quickly while having a regular 9 to 5 job, so he starts looking for a robot to do the trading for him. Unfortunately, with a lack of realistic expectations they are often a target and the perfect victim of scammers who are selling trading robots. It good if the trader acquires more knowledge of the market before attempting to purchase an automated system, just simply to be able to have a more realistic view of the market.

What is foreign exchange autotrading?

Foreign exchange automated trading is an emotionless way to trade the currency market, also know as the Forex market. Traders use a computer program to make trades on their behalf following some kind of a pre-set trading system that is programmed into the software.

The system is usually based on technical indicators and the signals are generated on the changes of the indicators’ values.

A lot of creativity can be implemented when creating a system and as time goes we are getting better and better programmed strategies as traders and programmers work together to improve automated trading even further.

Also called a trading robot, the software follows the programmed strategy 100% as it is laid out, therefore it is 100% emotion-free trading. The trader doesn’t have to make any decisions about where and when he will enter or exit a trade and in fact, he doesn’t even have to be around the trading desk as the automated system buys and sells on the trading terminal on its own.

Autotrading for the Forex market is usually using a scalping strategy, although any timeframe can be used and there is no problem to program the software to trade on a larger timeframe like the weekly timeframe. Scalping is also best suited for the foreign exchange market as it requires very high liquidity, something that the foreign exchange market offers, unlike other thin low liquidity markets.

Short term strategies like day trading and scalping are better suited for autotrading because they require a large number of trades to be executed daily, something that a trader is limited to do manually. The computer program can follow as many different markets, charts and systems as the trader programs it to and it will execute them all perfectly as per the program.

Also, the more short-term a strategy is the better technical analysis and technical indicators work, which is what autotrading is most often based on. The more longer term a trading method is the more it will rely on fundamentals and the harder it will be to program those things into a computer robot.

While it can be used in any financial market, autotrading is most popular and probably best suited for the foreign exchange market. The reason for this is because of the very high liquidity in this market and because it is a market that is open 24h a day from Monday to Friday. When employing automated trading strategies, currency traders can capitalize on market swings at all times 24h a day.