Like many questions about trading profitability, the answer is far from cut and dried. There are certainly people and businesses making substantial profits with automated trading. But it also has its pitfalls and there are a lot of scams and dubious claims out there.
There are various forms of automated trading.
Starting from the most simple, for instance, is a system of triggers that informs an FX trader to buy or sell automatically. From there it goes all the way up to a fully automated trading robot that is practically hands-off.
The larger players in the marketplace have very sophisticated algorithms that make thousands of trades per minute. However, we don’t have to go that far to get into automatization. And, if you can access high-frequency trading algorithms, you’re probably not going to be reading this.
AT and EA, What’s the Difference?
Automated Trading (AT) is a broader concept that comprises most activities around the use of algorithms and automated systems in forex trading.
On the MetaTrader 4 platform, the most popular among forex traders, there are customizable programs that assist with and can do automated FX trading. These are called Expert Advisors, or EAs.
EAs have become something of a short-hand among forex traders when referring to automated trading programs. Some people use “algo” and “EA” interchangeably, even though, technically, they are not the same.
Some FX traders also use “bots” when talking about automated trading systems. But, with social trading, there’s the potential for “bots” to be confused with the social media automated accounts. So, the use of “bots” in FX trading is falling out of fashion.
What AT Can Do For You
Your forex trading platform probably has a major limitation: it only follows your instructions.
If you aren’t there, because you are human and need to do human things like eat and sleep, you might be missing out on trading opportunities.
Most trading platforms allow you to add on an additional program that will place trades for you. The program can execute your instructions far faster than you can and analyze data and respond quicker, more precisely, and less emotionally than a human.
However, the actions are only taken based on the rules and instructions programmed into it by the designer.
It’s Not the Program, It’s The Programmer
A savvy FX trader can use a well-implemented robotic system to facilitate their own trading procedures. This way, they benefit from both their own skills, as well as the speed and consistency provided by a computer program. Sometimes, this is called an “app” or an “algo.”
How good that program will be at squeezing a profit out of the forex market will depend almost entirely on the strategy that it is programmed to use. The mere fact that it is a robot doesn’t change the profitability of the strategy; they are not artificial intelligence.
Although some machine learning is available to major trading houses and banks, those programs are usually way beyond the means of your average FX trader. When we are talking about automated trading, we are referring generally to programs that follow preset instructions.
So, the question of profitability depends on who programmed the robot. But there are some other upsides that are worth considering, too.
Trading Programs Have Some Advantages
Forex robots or EAs can help lighten the emotional and psychological burden of trading.
A program will follow the formula regardless of an emotional state that might cause hesitation or recklessness in a human trader. This lightning-fast consistent response helps turn a favorable trade signal into a profitable outcome.
Note that it says “helps”, not guarantees. There is no way to predict the future for sure when it comes to the markets.
Computer programs also have the ability to monitor more markets and signals than a person and turn that information into action. This allows for developing more sophisticated trades, including currency triangulation and other more advanced trading strategies and techniques that are harder for a human to process quickly.
Finally, one of the biggest attractions of forex robots is the idea of setting it and leaving it to work while you don’t have to be glued to the screen. Though it should be pointed out that this is only somewhat true. You still need to keep a very close eye on your program and correct and update it regularly.
Pitfalls of Automating
If you just buy a prepackaged EA or forex robot then you are at the mercy of the system that was designed by someone else. You won’t know when to correct it or intervene.
When market conditions change, it will require updating. And, you might not even know that it’s no longer working properly until your account balance has shrunk significantly!
On the other hand, if you create and maintain the system yourself, it requires a lot of work to set up, test and keep up to date with the changing marketplace. Also, you can’t code a successful forex trading strategy without first developing a tried and tested successful strategy. (Well, technically you can, but who wants a trading robot that doesn’t make money?)
There are a lot of people out there selling trading systems or forex robots. Most of them won’t turn a profit if bought by someone with little knowledge or experience in FX trading themselves.
This is unfortunate since one of the appeals of a trading robot is getting to use more advanced systems that other traders have, without having to spend a lot of time learning.
Even the ones that do initially prove profitable in the short term will become obsolete rather quickly. Obsolete systems mean losing money. So, it’s a good idea to beware of sales pitches that sound too good to be true. Particularly when they promise a large reward for very little effort.
The Bottom Line
Automation works best when you use it as a tool to assist your forex trading strategy. It has a hard time replacing you as a trader, but it can help you achieve greater consistency in your execution.
On the other end, it can also multiply the results of a winning strategy that you are already using. Small advantages make a big difference in your profitability at the end of the day when it comes to forex.