Introduction to Automated Forex Trading Strategy

Automated trading is a branch of systematic trading which combines computer software and hardware in order to generate non-stop trading activity, without human intervention. All automated trading systems are systematic, but not all systematic systems are automated.

 

The Global Arena

Forex trading is a global arena where different styles of traders compete against each other. Intraday and day-traders, swing-traders, and carry-traders open trading positions for just one reason, to sell higher. But no matter if they sell higher or lower, the demand they create due to their anticipations generates liquidity and trading volumes in the Foreign Exchange market. This retail activity is just a portion of the aggregate Forex Market activity which also includes transactions by central and commercial banks, hedge funds, large corporations, etc. In overall, the Foreign Exchange market volume activity exceeds US$5 trillion, on a daily basis.

Liquidity, extreme volume activity, and very tight spreads create an opportunity for the implementation of automated trading systems. An automated Forex trading system is taking into consideration key market data, such as price and volume, to recognize and trade short-term trends. By using technical analysis, an automated system can analyze the dynamics of demand/supply, and by comparing them to historical price behavior, can decide what and when to trade, without any human intervention.

 

Basic assumptions of Automated Trading

These are some basic assumptions for all automated-trading systems:

1. Historic results have at least some predictive ability {Sharpe 1994}
2. Financial Markets are not perfectly efficient
3. Financial Markets have a finite depth
4. Regularities in financial data do exist, but only for short periods of time, a window of opportunity may open, and then at some future time it will close
5. The financial data are driven by human psychology and societal decisions, and therefore are random and unstable

 

 

Components of an Automated Signaling Machine

All automated systems incorporate these two components:

1. The Forecasting Module

The forecasting module analyzes the market dynamics, and especially potential changes in the dynamics of demand/supply

2. The Action Module

The action module executes a specific trading action at a specific price and time (there is the ability to open, modify, or close positions)

 

Here are some different approaches to automated Forex trading:

 

 

 

Automated Forex Trading using Forex Robots, or else Expert Advisors (EAs)

Automated Forex Trading using an Expert Advisor is an easy and cost-effective practice.

In overall, trading with an Expert Advisor requires the following:

(i) A Trading account with an ECN/STP broker fully-allowing automated trading and scalping

→Compare ECN/STP brokers here: https://tradingcenter.org/index.php/trade/forex/ecn-forex-brokers

(ii) A trading platform that enables automated trading such as MetaTrader-4, MetaTrader-5, and StrategyQuant

(iii) An Expert Advisor,

→Find Expert Advisors here: https://tradingcenter.org/index.php/trade/forex/expert-advisors

(iv) A VPS Hosting service

A VPS hosting will enable the EA to operate 24/7 outside your PC. Many Forex brokers offer a free VPS hosting to traders, after meeting certain deposit and volume requirements.

Important advice when using EAs:

1. Check the team behind the Forex robot (programmers) before you buy it
2. Find out the past performance (minimum 2 years)
3. Test always a Forex robot on a demo account before you trade for real money
4. Use Forex robots only in ECN/STP accounts offering fast execution and tight spreads
5. Don't confuse manual and automated trading activity (open an account exclusively for your Forex EA)

 

Forex Arbitrage

Forex arbitrage aims to create profits by exploiting pricing inefficiencies between different brokers. That means buying an asset on Broker-A, and at the same time, sell another asset of equivalent value on Broker-B. After a short period, both positions are closed. In order for this practice to be profitable, you need exceptional technology. In overall, you need:

-Super powerful computer and extra fast internet connection

-Two trading accounts (in different brokers)

-Automated-trading software which can spot and trade instantly price inefficiencies

 

Creating Custom Automated Forex Trading Strategies without Programming

For those aiming to build custom automated strategies but they lack programming skills, there is an online application that offers a user-friendly interface and a wide variety of functions.

EA Builder Functionality

The EA Builder is a 100% web-based application that builds automated-trade strategies for MetaTrader-4, MetaTrader-5, and TradeStation platforms. The application can be used by every level of trading experience, and that includes even beginners.

Cost: Free for creating indicators, paid $97 USD ONE-TIME for creating EAs.

• Hundreds of built-in functions (technical analysis and money management)
• Applicable in every asset class (Forex, Equities, Commodities, etc.)
• The final outcome is a compiled file, ready to be used in MetaTrader-4, MetaTrader-5, and TradeStation
• Customer support and many video tutorials

» EA Builder Web App for Building Custom Automated Systems

 

Final Words

Automated Forex trading is a complex practice and it requires a lot of trading experience or even a professional background. The implementation of an Expert Advisor (EA) can make things considerably simple, but certainly, not all Expert Advisors are profitable. Therefore, it is wise to test any EA on a demo account before starting to trade for real money. The performance of every system should be evaluated over a period of at least one year. Building a custom automated trading system seems a more sophisticated idea.

 

■ Automated Forex Trading Strategies

George M. Protonotarios for TradingCenter.org (c)