Automated forex trading has become a common forex trading practice among all types of forex traders, especially new ones. The flexibility and scalability of the process has also made the forex market more profitable and popular.
What is automated forex trading?
Simply put, automated currency trading is trading currency pairs using automated software. The software constantly scans for market news, price changes, news, charts, and pattern formations, and uses complex calculations using current and past market data to find profitable opportunities. These programs often use sophisticated traditional indicators and pattern analyzers to find pattern formations, bottoms, highs, crossovers, advances, trade volume changes, spread discrepancies, and arbitrage opportunities. Upon finding the opportunity, the software generates signals and automatically places orders to buy or sell. These automated trading systems are also known as algorithms, black boxes, or robots.
As each trader’s goals, trading style, and risk tolerance differ from the others, these automated systems require some user-defined default rules to find opportunities and perform trades. The rules can include anything from finding margin discrepancies to placing the correct order size for a currency pair. Furthermore, the characteristics and configuration of these systems differ considerably and the way they interpret market data also differs considerably. Currently, there are web-based algorithms installed on the system.
Advantages of automated currency trading
1. Constant and emotionless negotiation: Since human interference in data interpretation and decision making is very low, if not not, basic human emotions such as greed and fear do not control any business decisions. Therefore, the operations will be more reasonable and consistent.
2. Saving time and absent commerce: Traders can operate 24 hours a day and can virtually go anywhere they want during business hours. Most trading software programs are fully customizable to be customized to your business style and requirements.
3. Faster trading and compounding: With automated systems, buy or sell orders are placed instantly. Because all criteria are predetermined, orders can be placed so quickly to capitalize on any prevailing market situation.
4. Good for speculators, referees and novices: Both speculation and arbitrage need a quick response to market movements and it is almost impossible with manually controlled trading software. Also, for new traders who do not have a lot of trading knowledge and experience in the market, automated trading may be a better option to test strategies, make profits, and avoid human emotions.
Disadvantages of automated forex trading
1. High cost and initial investment: Most advanced automated trading systems are expensive to buy or come as a package with a few prerequisites to meet. And the merchant must invest in creating the business infrastructure that includes one or more computers, high-speed Internet connection, power backup, and alternative backup systems.
2. It is not so easy to understand and operate: For a new operator or one who does not have much technical knowledge, the operation of commercial multi-window systems may suffer. Also, setting the correct rules and using the correct parameters can be a bit tricky.
3. Exchanges are as good as the rules: Since analysis and trades are performed according to predefined rules defined by the trader, trades will reflect your trading knowledge and experience in the market. For example, lax rules may generate many or false trading signals and stricter rules may not generate any signals.
4. Trading systems differ considerably and forex brokers charge differently for automated trading. Also, automated trading is generally limited to a handful of very popular currency pairs.