Introduction to forex automatic trading (forex autotrading), and my costly learnings from forex robots (forex Expert Advisor systems – fx EA systems)

 

So, let’s get started by describing what a forex robot is! Forex robots are the same as auto-trading systems or EA systems, Expert Advisor systems. Favorite children always have many names J. A forex robot is an automatic trading system that based on a script (software) is executing trading orders. The script itself is based on a pre-defined trading strategy. The orders are executed without any human interaction, which gives advantages such as:

·         Consistent trading. There is no subjective human biased interaction. No “subjective feelings or thoughts” are involved that can affect the trade

·         Immediate trading. The trade is executed automatically and directly when the trading signal from the forex trading script is created

·         The investor saves time trading. Since the system is following the market and executing orders based on the pre-defined trading strategy, the investor does not have to spend time constantly monitoring the market, waiting for the best trading opportunity to occur

·         The investor needs little knowledge about how the forex market works and how to trade since the trading is done automatically. (even though every investor should know what they (or the script) is doing and how it works - in order not to have any unpleasant surprises by the robot’s actions!)

 

Trading robots operate based on some kind of “trigger”. The trigger tells the trading robot when to execute the trade, and the trigger itself is based on a mathematical algorithm. The algorithms are often based on technical analysis (such as candlesticks, MACD), but can also be based on other trading patterns such as market implications from news events.

Read more about trading strategies here:

http://www.aboutcurrency.com/strategies/forextradingstrategies/forex_trading_strategies.shtml

There are tremendously many forex robot options available and the difficult part is to know which ones actually work - most of them seem awesome and promise great results, but I doubt this is actually the case! It is important to bear in mind that a robot trading script often works better in a specific trading climate - some can for instance work well in good economies and some in bad. Also, once a popular robot is being employed by very many users, the trading strategy risks to be “diluted”, i.e. because so many people are using the trading strategy it becomes less effective. So there is always a risk that a robot that performed well recently will not do well in the future. The robot trading script often has to continuously be updated in order to meet the new trading climate.

If you see good results from a robot the past six month there is unfortunately no guarantee that it will continue delivering good results, depending on issues such as the trading climate and the “crowd/volume” problem.

Picture above is from: forexrobotandtrick.blogspot.com

What kind of forex robots are out there, and how do I get a script working?

In order to start forex robot trading you need to find a robot script that you believe in. I am sure there are people out there making money by using forex robots – or at least companies making money from people using their robots J. So if you won’t become too discouraged from the reading of the next section below I have found some interesting web-pages analyzing the performance of forex robots. Check them out if you feel like it:

http://forexautotradinginsights.com

http://www.forexrobotstest.com/index.html
http://www.expertadvisorsforex.com
http://bestforexea.com
http://www.camforex.com

Once you have found a robot script you will have to install it, which often can be done on a MT4 trading platform. Once this is done the robot can start trading on the global forex market. Note that the robot will only be trading when your computer is on and when the MT4 platform has been started on your computer. A way to get around this is to implement the robot on a server that is operating 24/7.  Some companies do offer this service.

 

Picture above illustrates the robot script with the forex trading strategy being installed on the forex trading platform, which executes trades towards the global forex market

If you are a good computer programmer you can actually create your own trading scripts in MT4 based on your own favorite technical analysis!

Enough of the robot introduction! I am sure you wonder how I did with my choice of forex robot…

After too many hours spent looking for a great investment opportunity within a forex robot I finally found a local player (forextrade.se) offering an automated robot trading product which was based on so called grid-trading.

This grid-trading script strategy was based on the assumption that historical patterns between two very strongly correlated currencies will repeat over time. The currency pair can over time reach high levels both upwards- and downwards but has historically tended to go back to the middle of the chart (like a rubber-band), following a certain pattern. This forex robot product used this theory by dividing the historical development of the currency pair in two halves, based on the average currency pair’s movements over a long time period. Below the average line only buy-positions (trades) were created, since over time the currency pair will work its way up towards the average line again. Thereby the purchase positions would be locked in with a small profit. In a similar way only sell-positions were created in the area above the average line.

The trading robot created the grid with pre-defined buying /selling intervals between the grids. When the currency pair reaches a grid, a buy- or sell position was opened. Once the next grid was reached, the position closed. Several positions could be opened at the same time.

The picture illustrates where the forex trading robot opens sell- and buy positions

The largest risk with this forex trading strategy probably occurs if the currency pair breaks out from its historical patterns with many open positions, which would require a higher amount of invested capital than the recommended minimum employed capital for this forex robot. Unfortunately I invested in this forex robot in 2009 when the markets still were in kind of a chaos so the historical patterns did not really occur for the traded currencies... After having a good start with a profit of about 40% my beginners luck disappeared. So what happened was that I lost all my money - every single nickel and dime! (the forex trading platform automatically sold off all my open positions once my equity* reached zero. It is a built-in safety mechanism in the trading platforms so people can’t lose more than the invested capital. A very important feature as trading is most often performed with leverage!)

My only comfort was that I only lost half as much as I could have lost… Since I didn’t want to invest alone in this for me unknown and quite dangerous territory, I had persuaded a friend to split the investment and risk (and potential reward) with me… I don’t think he will be very keen to do another joint investment venture with me J

forextrade.se has stopped selling this grid-trading forex robot. I wonder why… J I haven’t tried any other forex robot trading after this adventure, but I have tried stock market robot trading. I will talk about this in my future postings. So stay tuned and subscribe to my blog (at the top right on my blog) - don’t miss out on more interesting stories!

* Equity = Balance minus open positions. Balance = total capital in the account (initial invested amount of money plus any profit made)