There are several traders who would like to take advantage of the currency exchange trade for profit, but they do not have the time to manually do the analysis required. For such traders, forex robots are an effective remedy to their predicament.
Also known as expert advisers (EAs), forex robots are automated programs that identify trading opportunities using a set of rules programmed into them. Once adequately programmed and tested, they prowl the markets 24 hours a day, 5 days a week, searching for signals that satisfy their programmed criteria.
Automated trading strategy
Essentially, a trading strategy is a set of rules that a trader follows to identify trading opportunities on the foreign exchange market. Traditionally, traders had to follow these rules manually and monitor their trades until they closed their positions.
With the evolution of technology, it has become possible for a computer program to identify these opportunities based on these rules. These programs, called forex robots, can identify signals and even go as far as executing and closing trades autonomously.
There are several robots available online, both for free and at a fee. Alternatively, armed with some programming knowledge, a trader may choose to create their own forex EA. Buying an existing robot is quicker, but there are several scammers posing as legitimate robots. Therefore, before choosing a forex robot, extensive research is paramount.
Factors to consider when choosing a forex EA
The best protection against scammers is extensive research. Before you buy an off-market EA, you have to ensure that you’re purchasing from a reputable source. Here are some of the factors to check in order to determine whether your vendor is legitimate.
- Backtesting
This refers to testing the robot’s performance on historical price charts to gauge its profitability. A good EA should have passed backtests on different market conditions and several currency pairs.
- Order size
Some forex robots only work with specific order sizes. Therefore, it is essential to test a potential robot with different order sizes to find out whether it affects performance.
- Live trading results
A good EA should be forward tested on live market conditions. Most EAs will provide a free trial version, so you can perform your own forward testing using a demo account.
- User reviews
The best EAs have been around for a while. Therefore, chances are there have been several reviews from their users over the years. Such reviews can provide you with honest feedback on the performance of a potential robot.
Pros and cons of forex EAs
Many traders think that you can use forex robots to operate their trading account blindly while profits roll into the bank. This is not the case. In as much as they take care of most of the tedious analysis work, they should be constantly supervised in case of any flaws. Though they are not perfect, they have a number of advantages and disadvantages.
Pros
- Forex EAs can trade 24/7. No human can keep track of the markets 24 hours a day, 5 days a week. Therefore, robots can identify more signals than most humans.
- They are devoid of human emotion. This means they cannot trade based on greed, fear, FOMO, or any other human emotion that leads many traders to loss.
- They have faster order execution times. The time between signal generation and order execution is greatly minimized, which means they can enter trades at much more opportune prices. This translates to increased profits.
- They can operate complex trading strategies. This is because computer programs are inherently better at multitasking; thus, they can check for different conditions simultaneously while identifying trade signals.
- They are easy to backtest. Once the strategy is defined, you can backtest years of historical data in a matter of minutes, as opposed to manual backtesting, which may take days.
- They are user-friendly. This means they can be used by any sort of trader, whether experienced or novice.
Cons
- They require fast and stable internet. Any interruptions may introduce glitches or make the program faulty, which could lead to losses.
- They do not take into account fundamental data. Forex robots rely solely on technical analysis and may wrongly trade movements caused by news releases.
- Most robots cannot trade choppy markets. They are designed to trade in trending markets, but when the market consolidates, their performance may be affected.
- There is always the risk of data-mining bias. This is when analysts cherry-pick results that support the robot’s performance instead of being objective with testing results. This could mislead potential investors.
How to best utilize a forex EA
- Limit your expectations. A robot will not make you a millionaire overnight, and you need to exercise the same caution as if you were trading the markets manually.
- Do your due diligence. There are several scams in the market posing as legitimate EAs. It is up to you to read user reviews and review their backtesting and forward testing results for legitimacy.
- Utilize the free trials. Most robots will offer free trials, and you should take advantage of them to find out whether the robot performs as advertised.
- Define your trading strategy extensively. Before you can utilize the robot, you have to have a trading plan in place. Describe all its parameters in detail to ensure the EA performs according to your trading plan.
- Closely monitor your forex robot. Since these EAs cannot account for fundamental indicators, it is up to you to keep regularly updating your robot’s parameters in line with the current financial climate.
Conclusion
A forex robot is an automated program that is capable of producing trade signals and executing trades. The inputs they require are all the parameters of your trading strategy, and it does the analysis and trading work for you. There are several illegitimate forex EAs out there, so you should do your due diligence before settling on any one robot.
