The forex market is a huge financial entity and one that sees trillions traded every day. There are various factors that have driven this growth too, aside from the technological advancements that have broken down the market’s historic barriers to entry. While this has enabled a larger number of people than ever before to trade currencies on the foreign exchange, we’ve also seen technology evolve to the point where automated trading systems can be deployed to optimize the volume of daily trades.
But what exactly is an automated trading, and how should this be used as part of your wider forex strategy? Let’s find out!
What is Automated Trading?
In simple terms, automated trading systems (which may also be described as algorithmic trading systems) are entities that allow investors to establish specific rules for both individual trade entries and exits.
Once programmed, these rules are subsequently automated through advanced algorithms, creating a potentially high volume of organized orders that account for risk and money management strategies.
Currently, it’s estimated that between 70% and 80% of shares traded on the US stock exchange are driven by automated trading systems, with this hinting at their numerous advantages in the digital age.
Perhaps the most obvious benefit is that automated trading minimizes human involvement and the risk posed by emotive decision making, which can undermine even the best-laid trading strategies.
On a similar note, it also allows patient and deterministic traders to engage in a process called ‘backtesting’, which involves applying specific rules to historical market data as a way of determining the viability of a certain strategy.
This is crucial in volatile but rules-driven markets such as foreign exchange, which are often accessed through real-time platforms such as the MetaTrader 4.
Of course, there are certain cons, primarily in the form of mechanical or software failures. However, these are incredibly rare given the efficiency of the aforementioned platforms such as the MT4, although you will have to account for the potentially poor performance of individual trades.
This is also true of non-automated trading, of course, but you’ll definitely have to monitor your activity to ensure the impact and efficacy of your orders over time.
Where Should Automated Trading Fit Into Your Forex Strategy?
There’s no doubt that the related concepts of automated and high-frequency trading are now more in vogue than ever before, while the advantages of such systems far outweigh their potential drawbacks.
However, automated trading should never be considered as a substitute for carefully executed and human-led strategies, particularly if you have existing knowledge of the marketplace and remain wary of potential technology failures.
This type of knowledge is also key when leveraging trading systems, so you should consider using this as a small part of your wider forex strategy before looking to scale this organically as and when appropriate.
Similarly, you should also look to consider incorporating automated tools into your trading strategies when starting out, with stop-losses offering a relevant case in point.
This works by automatically closing positions once they’ve incurred a predetermined level of loss, enabling you to safeguard your capital even in a volatile marketplace.