Risks and Benefits of Automated Software in Forex Trading

[RichardCox 10]

Many forex traders look to automated trading software in the hope of gaining an approach to the market that is thought out, unemotional, logic based, able to consistently repeat profitable trades, and will execute those trades immediately after opportunities present themselves.

 

These qualities represent the best features of the automated software that is available for forex trading, and there is a wide variety of commercial programs that are designed scan the available markets for profitable trading opportunities and to function without the presence of an active trader. The scans conducted by these programs can be structured using parameters that are pre-set by the programmers or with trading rules set by the user.

 

 

Range of Choices

 

There is automated software that is designed for beginner, experienced, and advanced traders, coming in a large range of prices and levels of user sophistication. As with anything, it makes sense to read some of the online reviews that are available before committing to any decisions. Some of these programs offer trial periods and other incentives, so in many cases traders can test these programs before making any purchases.

 

While automated trading programs can offer some clear advantages, they are still far from infallible, so it should always be remembered that this software does not guarantee that trade after trade will be profitable (despite what many of their advertisements will tell you).

 

How Do these Programs Operate?

 

Automated trading software is essentially a computer program that will analyze the price behavior (or other activity) that is seen in a currency chart. This might include factors like discrepancies in the spreads, deviations from moving averages, trend behavior or significant gaps in the market you are watching.

 

The program will then use this information to locate trades that are potentially profitable and price levels for exits and entries in currency pair trades. So, once the trading criteria is set, the software will identify which currency pairs satisfy the initial price parameters. This creates either a buy or sell alert and then the trade is placed automatically. Traders will often refer to this method as Black Box trading, Algorithmic trading or “Robot” trading.

 

Taking the Emotion Out of Trading

 

One of the most significant advantages of trading with automated software is that the user is then able to eliminate influences that are created by psychological and emotional factors, and, instead, rely on mathematical approaches that are based on logic and consistency, using either the default trading parameters or ones that you design yourself.

 

Since traders of all experience levels will inevitably be influenced by irrational psychological factors, those using automated software can help reduce lapses in judgment in order to avoid errors. For some strategies, such as those based on discrepancies in spreads, this approach can be highly effective and easy to execute. Other situations, such as crossovers in moving averages, chart patterns, breakouts, or other delineations of support and resistance can also be used.

 

Managing Multiple Accounts

 

In addition to these “ease of use” advantages, traders are also able to capitalize on the ability to manage multiple accounts at one time. Techniques like this can be difficult for manual traders using one computer, so for those looking to execute trades with more than one account, automated software can greatly simplify the process.

 

But perhaps the primary advantage is the fact that traders are not tied to a PC at all times when trades are active. The fact is that many traders simply do not have the time to constantly watch trades one they are open, so in these cases, automated software can offer solutions, since these programs will constantly scan the market for opportunities and adjust trades as time unfolds.

 

Avoiding the Wrong Automated Trading Software

 

Since these are cases where real money is put at risk, traders should approach advertised claims of substantial profits with some level of skepticism, especially when these profits are said to occur quickly. Many trading programs are offered on the market - some are excellent, some are adequate but exhibit some design flaws, and some should be avoided entirely. Generally, there is an inverse correlation between the level of proposed profits and the true adequacy of the program.

 

So, when ads claim a product will generate 95% in winning trades (or thereabouts), caution should be exercised. Reputable publishers will always provide verifiable trading histories in order to demonstrate the efficacy of their products.

 

Assessing Your Trading Needs

 

So, in order to choose the right trading software for you, first you will need to assess your trading needs. These programs will vary in terms of performance, speed, programmability, forecasting accuracy, trading frequency, and general ease of use. So what works well for one trader might be insufficient for another.

 

For example, trading priorities might center on programs that generate detailed reports, implements stop losses, manages trades with trailing stops, or exercises other types of market orders. Other traders might want s much more automated process, more along the lines of “set it and forget it” programs that require less user effort. In other cases, remote access might be essential and the use of a VPS (Virtual Private Server hosting) might be worth consideration.

 

A List of Factors to Remember

 

• Most automated software systems trade the most popular currency pairs (becomes of high volumes and better liquidity), so this would include the EUR/USD, USD/JPY, GBP/USD and USD/CHF
  
• Trading techniques vary from conservative to aggressive, with some programs looking to scalp a few pips and others profiting from longer term trends. Choosing a trading style is very important for defining levels of risk.
  
• Customer product reviews can provide a good source of reference for the accuracy of the trading results, read these before buying anything in order to identify scams.
  
• Always shop around. With so many products on the market, some very good programs are offered at relatively low costs. But also remember that cheaper is not always better in these cases.
  
• Use programs that offer technical and customer service support. This is important for new traders or those unfamiliar with programming software.
  

Conclusion

 

The use of automated trading software can provide many advantages for investors of all experience levels. And while some products offer performance results that are well beyond what is actually possible, there are many companies that provide reliable offerings that can generate significant returns over time. One way to avoid being scammed is to look at the consumer alert websites offered by the Commodity Futures Trading Commission and the National Futures Association, as this can help to prevent unfavorable surprises later.

The forex market is fast-moving, highly dynamic and always open for trade. This can make it difficult sometimes to identify new trading opportunities on a constant basis. But when using automated software programs, traders are able to remove the irrational elements of psychology and emotion, and this can prove highly valuable when looking to sidestep some of the mistakes traders have made in the past.

[sidra 10]

I need to know one disadvantage of such software? How they can give good sight as compared to the human mind? it can make analysis easier instead !

[BRichard 10]

Thank you Richard for the awesome article

[earnspread 10]

Well written and usefull information!