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)

Introduction to the forex trading market (FX), and FX trading

I find the forex (foreign exchange) market very fascinating. It is the largest financial market in the world, with a turnover of about 1,5 trillion dollar per day! When trading forex you trade in currency pairs, for instance EUR/USD, with the aim to gain profit from fluctuations in the exchange rate.

Forex (FX) is traded in lots, which represent 100,000 units of the base currency. If the EUR/USD is quoted at 1.2253, that means that one Euro is currently worth just over $1.22. If the market moves from 1.2253 up to 1.2254 that represents a move of one pip. A pip is the smallest increment a currency pair can move and in the case of the EUR/USD currency pair a pip is worth $1 in a Standard 10K account and $0.10 in a Micro account (Source: http://www.forexmicrolot.com/how-is-fx-traded.jsp).

There are a number of factors that makes this market attractive for investors such as;

·         The forex market’s three trading regions (Australia, Europe and North America) cover all time zones, which creates good trading flexibility as the market is open 24 hours per day

·         High  leverage is available for invested money, which lets an investor with limited investment assets access the forex market. 100:1 leverage is not uncommon. Even though leverage can be seen as an advantage, it is also a huge risk (see the next section under “risks”)

·         Both buying and selling positions (orders) are available, providing the possibility to make profit in both good- and bad economies

·         There is high liquidity on the forex market, providing good opportunities to instant execution of your trading

But there are definitely risks worth considering before investing in the forex market. I have found the following points from ESMA (European Securities and markets authority, http://www.esma.europa.eu/news/Investing-foreign-exchange-forex):

Complexity

Not all forex transactions are straight-forward. If you do not understand the complex nature of certain transactions in currency-derivatives transactions, you should exercise care.

Before deciding to trade, you should carefully consider your investment objectives, level of experience, and risk appetite.

 

Volatility
Exchange rates fluctuate depending on several factors, including political situations, interest rates, monetary policy and inflation. Fluctuations are unpredictable, and the market could suddenly move against your interest. This will affect the price of your forex contract and related potential gains and losses. 

Leverage

To start trading, you deposit an amount of money (also called a ‘margin’, or ‘account’, or ‘security deposit’) with your forex broker. Even a small amount of money can enable you to trade large volumes of currency. This is because some forex trading products are highly ‘leveraged’.

The smaller the deposit is in relation to the underlying value of the contract, the greater the leverage. And the higher the leverage, the more likely you are to lose your entire investment if exchange rates move in a direction you do not anticipate.

It is very important to understand that although leverage can increase the returns on your investment, it can equally work against you by magnifying your losses. There is a risk that you could lose some of, all, or even more than, your initial deposit. For example, if you invest €100 with a leverage of 200, you will owe €2000 if the value of the instrument loses 10% of its value (10% of 100 multiplied by 200). In addition to this, you may be obliged to pay transaction fees and/or financing charges.

So how does it work if I want to start trading?
Starting to trade forex is actually quite simple (making money is harder though J ). You will need a so called trading platform that you can install on your computer. From this trading platform trades are executed towards the global forex market.

 

  Figure: forex platform trading towards the global forex market

(Figure to the right comes from: http://w.mintkit.com/2011/02/how-forex-affects-etf-for-global.html)

The most common trading platform is probably based on MT4 (MetaTrader 4). Many forex brokers offer trading platforms for free, as they are making profits of the FX spread when you execute your forex trading orders from their platforms. A good thing with trading platforms is that they often have a demo account set up with real forex data so you can test forex trading without using real money, very convenient and safe! Below are some brokers you could consider if you want to start trading:

(http://www.fxpro.com )

 

 

Best ECN/STP Broker - World Finance Foreign Exchange Awards 2012.

FxPro’s client base primarily consists of retail traders but it is increasingly servicing institutional partners as well, with transactions exclusively being executed online. Due to its rapid progression, FxPro’s client services are now offered to more than 150 countries worldwide.

 

(http://www.fxcm.com/)


Voted Largest Forex Provider by Investment Trends (2012).

FXCM Inc. (NYSE: FXCM) is a global online provider of foreign exchange (forex) trading and related services to retail and institutional customers world-wide.

 

(http://www.avafx.com)

The Ava group is one of the world’s leading on-line forex trading brokers. More than 200,000 registered customers from 160 plus countries world-wide execute over 2 million trades per month with Ava, with total trading volumes exceeding $50 billion / month*.

I have found a homepage reviewing forex trading platforms that may be handy for you, http://www.fxstrategy.com/forex-platform-reviews.

Below is an screenshot I have taken from my own forex trading platform to show what a FX MT4 trading platform could look like:

 

In my next posting I will tell you about automatic forex trading (EA robots) and how I got burned by it - unfortunately a very costly lesson for me! So stay tuned and subscribe to my blog, don’t miss out these interesting stories!

P.S. for more reading about forex, see also:

http://www.babypips.com/school (this “forex school” is awesome if you want to learn more!)

http://financialhighway.com/why-invest-in-the-forex-market

http://www.investopedia.com/ask/answers/05/forex24hoursaday.asp#axzz2IMLLtQNM