Over the past several decades, rapidly evolving technologies have fundamentally changed the way business is conducted on the forex market. In the place of the discretionary trader, systems based on automation, algorithms and early forms of artificial intelligence have become popular among market participants.
The rise of automation in the marketplace has created a need for devices capable of executing advanced rules-based trading strategies. One such tool that offers traders a completely hands-off approach to the market is the forex robot.
A forex robot is a computer program that recognises and executes trades automatically according to predetermined criteria. It buys and sells currency pairs on behalf of the trader in adherence to the rules put forth by a comprehensive trading approach.
Forex Robots: Functionality
The functionality of a forex robot may be simple or extremely complex. However, no matter how intricate the robot's coding is, several basic functions are supported:
- Trade Recognition: The forex robot is able to identify opportune trading conditions using clearly defined criteria. Trade setups may be based on any guideline of technical analysis, including momentum, order flow, and support and resistance levels.
- Order Placement: Entering and exiting the forex efficiently is a key aspect of profitable trading. The forex robot is capable of placing orders on the market to direct the buying and selling of a specific currency pairing at an exact time.
- Position Management: Within the programming code of the forex robot, parameters for open position management are typically included. Stop losses and profit targets are located and placed on the market seamlessly. Unique trade management strategies such as trailing stops or scaling may also be supported.
As the marketplace has transitioned from being a physical presence to an exclusively digital one, many of the basic mechanics of trading have changed. Speed, volatility and a need for technological competence have come to the forefront. In order to adapt to these conditions, many participants have employed forex robots in an attempt to stay competitive and on the technological "lead lap."
Forex Robots: Pros And Cons
Forex robots offer the trader several unique advantages and disadvantages. Depending on the type of trading and resources available, automation may be a worthwhile endeavour or a potentially disastrous undertaking. Ultimately, the responsibility falls on the individual to perform the due diligence necessary in determining the suitability of a forex robot.
A fully automated approach to the forex furnishes traders with several advantages. No matter if one is practicing an intraday, day or swing trading methodology, a forex robot can help reduce many of the negative impacts attributed to the "human element." Those include:
- Precision: Precise order entry and signal recognition greatly reduces the impact of human error upon trade execution.
- Limits Emotional Trading: Several of the most common pitfalls facing market participants are related to emotional trading. Fear and greed lead to many poor habits, including overtrading and haphazard risk management. Automation limits the ability of human intervention to undermine consistency.
- Extensive Capabilities: Forex robots are able to scan a multitude of products for opportunity simultaneously, around the clock.
- Latency Reduction: Trading decisions are made automatically without any user hesitation. When coupled with private server hosting or direct market access (DMA), trade-related latencies may be greatly reduced.
The reduction of unforced errors and identification of additional opportunities within the market can help bolster the bottom line of any trading operation. Given the proper resources and adopted strategy, a forex robot may be a valued part of a comprehensive approach to the currency markets.
However, forex robots are not foolproof. Due to the technical nature of the systems that govern their functionality, there are multiple drawbacks to adopting a purely automated market strategy. The following are a few of the most prevalent:
- Bugs/Glitches: A computer "bug" or "glitch" can undermine the effectiveness of the forex robot. Whether originating at the market, brokerage, or harbored locally, any element that influences functionality can be detrimental to profitability.
- Hacking: Malicious software or hacking activities can render an automated trading strategy useless. In the event that network integrity is compromised, the live connection to the market and order-entry capabilities may be negatively influenced.
- Limited Shelf-Life: Most black-box systems are successful for a limited period of time. As market conditions evolve, trading rules that proved valid in the past have a tendency of becoming obsolete. Without periodic recalibration, a forex robot may become outdated and ineffective in a relatively short time.
- Inability To Reason: The markets are dynamic atmospheres. In times of shifting fundamentals, forex robots are unable to adapt to the changing conditions. Periods of heightened or stagnate volatility may render the existing trading rules ineffective, with the forex robot continuing to execute negative expectation trades.
Forex robots are available for integration into a wide-variety of software trading platforms. Third-party developers typically offer robots for use on a complimentary, subscription or purchase basis. While readily accessible, it is imperative that the trader researches both the developer and performance metrics before purchasing or risking real capital.
It is worth mentioning that many forex robots are sold by less-than-reputable companies. Skewed performance metrics and worthless guarantees are common in the robot industry. While the technology and advantages of automation may seem attractive, the possibility of falling victim to fraud does exist.
The ascent of sophisticated technologies within the financial arena has made automated trading popular among market participants. Success stemming from many high-profile institutions, as well as the advent of disciplines such as high-frequency trading (HFT), has brought automation into the mainstream.
Forex robots are not a ticket to instant profitability. While they may be useful, there remains a considerable chance of failure unless the strategy and technology that drive functionality are sound. A comprehensive trading plan coupled with a solid technical knowledge base are two necessities for a trader looking to automate successfully. Given the appropriate inputs and strategy, a forex robot can be a potentially worthwhile addition to nearly any currency trading operation.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…