A simple solution for saving time in trading is a very common trading practice which entails special software. This special software is added to a trading platform, and it’s called Expert Advisor (EA). There are many Expert Advisors (EAs) which can satisfy many trading strategies and styles.
Relatively small size computer programs, EAs or trading robots, are used to place trades on behalf of traders. These programs are designed to analyze market conditions or generate trading signals and according to predefined settings, parameters, and rules to place and execute trading orders accordingly. These trading rules can be based on various market indicators, like Moving Averages (MAs), Support and Resistance Levels or other mathematical equations.
The main goal of auto trading is the use of robots, so traders can have successful and profitable trades, no matter the Market’s trading conditions. In addition, it takes out any human error or a bad decision which may negatively affect an active market portfolio.
Expert Advisors and automatic trading strategies have several potential benefits when they are used correctly:
- Consistency: Robo trading strategies follow predefined rules consistently, and orders are being executed without deviations from the EA settings. Emotional biases which can affect human decision-making are eliminated.
- 24/7 trading: Since automatic trading is executed via computer program(s), it means that it can operate continuously without the need of human supervision (or the minimum required). Traders should not spend whole days and nights in front of computer screens to monitor trades, analyze price movements, spikes, news, etc. All trading positions are being placed automatically at any given time by the robots.
- Increased speed: Having an automated system monitoring many trading symbols and currency pairs, upon applying specific rules, trades can be executed faster than upon placed from a human trader. EAs and robots can take advantage of even small trading opportunities at any given time.
- Back-testing and optimization: Almost all automated trading systems allow traders to back-test EA strategies using historical market data. This is the best way to evaluate the performance and profitability of a trading strategy. Using back-testing results, traders can also optimize the EA settings and parameters while adjusting and testing different scenarios (open trades with smaller or bigger size, open trades more or less frequently, etc).
Using all the above advantages, how does an Expert Advisor place trades? What drives its final decision to open and close orders?
We can categorize all robot trading and their trading decisions into two (2) main categories:
- Data analysis: Auto-trading systems can process and analyze enormous amounts of data, including historical price data, several media feeds and other relevant information. Recent machine learning algorithms can be used to identify price correlations and trends within the data processed.
- Pattern recognition: Other robot trading machines are designed to place trades upon recognizing certain patterns in market data. Having also checked historical data and patterns, systems can make predictions about future prices or price movements and market conditions, like a start or an end of a trend.
It is important to note that automatic trading also has certain risks. If a trader does not set up the parameters and rules correctly, an EA may start placing trades and a trader’s portfolio can be lost very quickly. For this reason, it is always wise to contact the EA provider for explanations on how the settings of an EA should be adjusted and saved. Back-testing is also useful to understand how an EA works, when it places trades and when it closes the positions.
The Forex Market is quite volatile and market conditions are unpredictable. Therefore, a trading strategy which is tested, and works does not mean that it will keep working effectively forever. Adjustments, detailed research, and tests should be done constantly, and especially before deploying an automated trading system upon real money trading account(s). Having proper risk management measures is the key to success, since there is no EA which promises 100% guaranteed profits forever.