Algo Trading 101: What Forex Robots Are and How to Choose The Best Ones To Trade With

Forex robots are programs that use algorithms to trade automatically or semi-automatically in the market. With or without the presence of a trader, the best ones are able to gain enough profits while ‘staying alive’. Many Forex beginners turn their heads to robots- these ‘pros’ are capable of doing and executing the complicated mathematical calculations within splits seconds, at the same time keeping their ‘heads’ cool. Thus, the renowned title, Expert Advisors.

In this post, you will learn:

  1. What Forex Robots are
  2. 8 types of algorithms used frequently in trading
  3. 4 essential traits of a reliable robot

 

 

Despite its growing popularity over the years, many are skeptical against robots. One main concern describes the safety of account balances when handled by electronics. Others too have voiced their doubts over the credibility of these robots piling up in the market. Truth to be told, not all robots available, are reliable. For many businesses, it is a quick-and-easy money scheme, since all transactions are made online real quick, so no one really knows the person behind it, except for a name whose face we cannot imagine nor relate.

 

Finding, testing and retesting the most effective robot tied to your current understanding and style of trading can take a while. There are essentially 8 types of algorithms used to program robots.

1. Trend following

These robots use technical indicators to interpret historical data and then compare it with recent numbers to place a buy/sell order.

 

2. Mean reversion

This method assumes that the market ranges 80% of the time. Robots take historical data to calculate an average asset price. Hoping that the current price would revert or reverse, the robot places an order, and reaps the profits when it hits the average.

 

3. News-based

Forex market is very susceptible to news updates. Speeches from influential figures (such as George Soros and the Federal Reserve) could potentially send the market plunging or rising. By comparing data results to market consensus or the previous data, these robots will position their trades.

 

4. Market sentiment

In the daily market, trading are driven by human emotions. Some wake up to believe that today’s market will appear bullish, while on the other spectrum are those who hope to see a bearish trend. These decision-makers generate the market sentiment. The futures market too helps predict the trend of currency pairs using the CoT (Commitments o Traders) report. Modern approaches now include scanning social media networks to gauge the currency buy/sell trends.

5. Arbitrage

Forex traders profit off price imbalances within several currency pairs across different markets. Robots can be programmed to do the same- this time with higher precision (more accurate algorithmic calculations), more efficiency (faster and simultaneous trade orders) and thus bigger profits. Triangular arbitrage involves the buy and sell of two currency pairs. Let’s take for example, Miriam has a total savings of $2,000,000. She goes to Bank Alpha and converts the greenbacks to euros.

Forex traders profit off price imbalances in several currency pairs across different markets. Robots can be programmed to do the same- this time only with higher precision (more accurate algo calculations), more efficiency (faster and simultaneous trade orders) and thus bigger profits. Triangular arbitrage involves the buy and sell of two currency pairs. Let’s take for example, Miriam has a total savings of $2,000,000. One day she decides to visit Bank Alpha and converts all the greenbacks to euros.

Bank Alpha: EUR/USD= 0.894

$2,000,000 x 0.894 = €1,788,000

Miriam now owns a total of €1,788,00. Next, she visits Bank Beta and coverts all the euros and pounds.

Bank Beta: EUR/GBP= 1.276

€1,788,000/1.276 = £1,401,254

Finally, seeing an opportunity to profit off the spread, Miriam visits the next financial institution and converts all pounds back to dollars.

Bank Constance: USD/GBP = 1.432

£1,401,254 x 1.432 = $2,006,596 

Total profits gained = $6,596

6. High frequency trading

Just as its name suggest, these robots perform calculations and trade order simultaneously within the matters of seconds. Arbitrage and/or scalping are examples of this method most pursued by traders who have keen eyes for and profit off small pip movements in short term trades, usually within the frame of M1 to M30, while involving high trading volme.

 

7. Iceberging

There are 3 types of traders in the Forex: commercial traders, large speculators and small speculators. Banking institutions are the big, commercial players. How big? When traded in full volumes, you’d witness sudden spikes and lows. But the fluctuations, they don’t do much, other than disrupting the market, and inviting the odds to your doorstep. To avoid putting themselves at a disadvantage, banks break down their trades in smaller volumes into several trades. These robots are even capable of trading at different hours through different brokers to eliminate the risk of being identified. Putting themselves behind sheets of security, it becomes difficult to trace their activities, and hence it is said that, the price movements that we see, are only the tip of an iceberg.

 

8. Stealth

If you think the previous is tricky, this is beyond what you have imagined. Iceberging has been on and around for a while now, and there are hackers who enjoy the reward of revealing matters behind a scene. Dedicating themselves to create an algorithm that pieces the small order, hackers are able to distinguish if someone big is behind the trade. But to do this, first you require the knowledge of a financial analyst, and the skills of a computer programmer trained in the language of C++, C# and/or Java.

4 Essential Traits of A Reliable EA

Flooded by an immense amount of Forex robots in the Internet, picking out one which works great for you can take some time. By filtering them following these 4 criteria, the process can definitely be sped up.

1. The best of Expert Advisors must be able to perform stable trades 24/5 without optimization, which is to say by default settings. Our end goals in this game is to make profits. And to keep playing, your accounts must pull through and stay ‘alive’.

2. Preferably, go for robots that require only simple operations and management. Convenience is a plus for everyone, while complications are generally a fuss.

3. Some robots show amazing results on their test runs. But, this does not necessarily mean you can duplicate the same. Some only perform great algo trade with one currency pair, and when applied to a different pair you’d see its performance in much despair. Also pipsing bots on demo accounts are exempted from slippage and requotes. What the advertisement shows is only one side of the coin. Remember always that, expensive is NOT better.

4. You may have came across forums where people flock into a thread because they sworn to have found the Holy Grail. Be careful with that. Many experts still struggle with robots, where they more often that not, they find their methods no longer work, and are required to start fresh again. Needless to say a rookie who has difficulty interpreting indicators and graphs, as well as perform calculations to open a position. Robots that guarantee a return in millions in a short few days are mostly frauds.

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