Advanced Forex Blog

What is an Automated Forex Trading System and How Does it Work

May 12, 2022 | 4:32 pm | Advanced Forex Blog
May 12, 2022 | 4:32 pm
Advanced Forex Blog
What is an Automated Forex Trading System and How Does it Works

Automated Forex Trading System

Also known as a mechanical trading system, an automated trading system gives traders the ability to specify trade entry and exit rules. Then, once they have been programmed, you can execute these rules automatically via a computer.

It’s a fact that more than 70% of trading in the US stock exchange is a result of automatic trading systems. This strategy is also known as algorithmic trading. It allows investors and traders to turn exact entries, exits, and other management rules into an automated system, which helps the computer execute the trades and monitor them.


Why Do You Need an Automated Forex Trading Strategy?

The answer to this question lies in itself. This “automated” strategy rids you of many sleepless nights and hours of effort. Furthermore, this system executes transactions on your behalf on one or multiple currency pairs. Even though you can do all this manually, the involvement of this system reduces the emotions in this situation and works more efficiently than a human ever could.

These trading robots can monitor markets on any day or at any time. Not only this, but they can search for new opportunities for you while executing your transactions simultaneously.


Important Steps for Building an Automated Forex Trading System

Since these systems have so many advantages, we understand how tempting it is to automate your own forex trading strategy.

So here are some important tips to automate a forex trading system.

Creating a Detailed Trading Plan

If you’re with forex trading, you would know how important it is to have a detailed trading plan. With this, you’ll be able to identify your targets and define how your automated system will achieve them. Your plan should consider the markets you want your system to trade in, your risk/reward ratio, the time of functioning, and the strategy you’ll be using.

Designing the System

Now that you know what your system will do, it’s time to decide how. In this step, you will determine how your system will spot an opportunity and what action it will be taken afterward. For example, you can make your system place a transaction or notify you about it. 

To simplify the design, consider your usual indicators and tools to identify trends, such as moving averages and ROI, and your usual way of making transactions. In addition, you must base your automated forex trading system on your knowledge of trading, financial markets, and technical analysis. Therefore, you obviously need to know a good deal about this trading field.

Choosing Tools for Risk Management

This is undoubtedly one of the most important parts of the whole procedure. Depending on the platform you are using, you will have three types of stop-losses: basic, guaranteed, and trailing.

The basic stop closes your position as near as possible to the specified price level. That being said, this position could sometimes be worse than the charged price. But this only happens if either the market is facing rapid changes or if there are any gaps.  

As the name suggests, your position will always be closed to the specified level if you go with the guaranteed stop. However, whenever the stop is set off, you will have to pay a small amount as a premium.

Last but not least, the trailing stop is used if you want to follow positive price movements. This is beneficial because it guarantees profits. But, naturally, this also doesn’t guarantee the stop level, so it can slip if the market changes rapidly.

Alternatively, you can use a limit for this purpose. A limit closes your transaction automatically if the price moves to a desirable level. A limit gives you what a stop cannot because, when triggered, a limit will close at the price you specified or even better than that.

Turn it Into Code

If you have planned and designed your system, it’s time to turn it into code. First, choose a platform and determine which coding language it uses. Your design should complement the platform you’re going to use. Also, it’s important to know what can be turned into code or what cannot. Therefore, you would need a decent knowledge of programming and your platform.


Building an Automated System or Hiring a Developer

This step can intimidate you, so we recommend hiring a developer if you don’t know how to code. With a professional, you will get a code with minimum issues in a minimum amount of time.

Building an automated system

Backtesting and Perfecting

Now that you have your system ready to use, it’s best to perform a backtest on it. Backtesting is to an automated system as a test drive is to cars. Backtesting is simply testing your system using historical data and setting it off to get you the best results. 

Backtesting is important whether you build your own automated trading system or simply buy a standard system. This step shows you how well the system will perform without asking for any investment.

Example of backtesting results

Example of backtesting results

Even though backtesting is a great tool to determine the efficiency of your automated forex trading system, you should keep in mind that it has a shortcoming. The results of static data (that you use for backtesting) cannot always represent what will happen in a live market situation. In the case of static data, various factors are not taken into account, such as liquidity. 


Automated Forex Trading System Summary

The steps mentioned above will surely get you an efficient automated forex trading system. However, do not let the word “automation” deceive you. We recommend you keep checking up on your system even after implementing it.

The market conditions keep changing, and many problems come without alerting anyone. And even the best-automated trading system can have some restraints in these situations.

Further, your trading system will work based only on your technical analysis. However, it will need your help to adapt to the effects of economically significant events and market conditions that only a human can assess.

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