Clearing the Air on Automated Trading in Forex

It has come to my attention recently that opinions on automated trading, especially in the retail Forex market, tend to consist of mixed opinions which usually results in heated discussions within the trading community. I think the main cause of these disagreements is due to the fact that everybody seems to have their own definition on what automated trading means. In today’s post, I will attempt to explain the situation as best as I can from my personal and professional perspective. At the end I will offer my own opinions on the matter.

Let’s start by first clearing up some common terms that are thrown around whenever there is a discussion over automated trading in the Forex market. This will help start everybody off on the right page so we are able to have more clarity in our dialogue.

Algorithmic trading is simply mechanical trading following a set of procedures, rules or when objective conditions are met. Algorithmic trading DOES NOT necessarily mean automated trading, since it is simply following a set of rules; you can follow and trade these rules manually or program it in code. With that being said, the automation of algorithmic trading systems hold many benefits to traders as it allows one to be able to backtest as well as optimise the system rules and parameters using historical market data.

Automated trading is the process of automating certain parts or all logic of a trading system, generally using software. Automated trading could mean something as small as setting a take profit and stop loss after a trader manually opens a new position, or it could mean automating an entire trading system that can look for entries, calculate position sizes, manage risk, exit positions, and other features required by the operator/trader. Without becoming too philosophical, discretionary trading systems simply cannot be automated.

An Expert Advisor (EA) is a proprietary file format used to program and execute automated trading supported only by the MetaTrader 4 (MT4) and MetaTrader 5 (MT5) trading platforms. Programming a trading system as an EA will allow a trader to backtest/optimise the system through MT4 and MT5’s Strategy Tester as well as execute it real-time in live markets. I see many traders using the term EA and automated trading interchangeably, which can lead to some miscommunication.

High-frequency trading (HFT), as the name suggests, is trading at high speeds that leverages high-frequency market data. Hundreds or even thousands of orders can be placed within a time span of a few seconds, with each position seeking relatively small profits. A HFT strategy is algorithmic in nature and can be considered a sub-category of algorithmic trading. HFT is almost always automated due to data processing and execution requirements.

A trading system is a set of rules or conditions that traders can use to make trading and investment decisions. These rules and/or conditions can be subjective (discretionary) and objective (mechanical). A discretionary trading system will leverage the trader’s experience, knowledge, and intuition to make trading decisions. On the other hand, a mechanical trading system will have a set of hard and quantifiable rules, and with a little effort can be written as an algorithm. “Trading system”, “trading model”, and “trading strategy” are generally terms that can be used interchangeably.

Before I dive into my opinions, I encourage you to take what I have to say with a grain of salt. My experiences and opinions will differ with yours and that is perfectly fine! Everybody is entitled to their own opinions and I hope that by sharing my perspectives we can get the ball rolling on healthy and productive discussions.

Now that we have gotten the basic terms out of the way, we can shed some light on automated trading in the Forex market. There is perhaps a general misconception in the retail Forex community that automated trading is an easy way out. What I mean by this is that I see many individuals who seem confident in that all it takes to be profitable is to purchase premade trading “robots” (usually in the form of EAs), set it on auto-pilot and watch their trading account collect profits. In reality, what ends up happening is that they spend hundreds if not thousands of their hard-earned money on EAs from various online vendors only to have it unexpectedly blow up their trading accounts; some not even making it past demo accounts. In order to keep this article short, I will forgo explaining the reasons why these commercial EAs do not perform as marketed; but if there is interest I will make sure to make another post explaining why commercial EAs fail.

This is NOT automated trading. This is just an example of how mis-informed the trading community can be.

Real automated trading can take years to understand on top of having a strong trading foundation; it requires technical skills as well as a shift in problem solving. To be an automated trader a strong mathematics, statistics, and programming background is required, alongside market and trading experience; some machine learning basics can go a long way as well. Like any business venture, it takes dedication to truly become successful. A trader needs to familiarize themselves with each step and process involved. Only then can an automated trader plan, design, prototype, backtest/optimise, execute, and manage their own automated trading systems (ATS) on their own. Only by being in control of each step along the way, will an automated trader have any real chance of becoming consistently profitable in the long run.

To summarize, automated trading done correctly can potentially yield a healthy return on investment, but effort and dedication is a must; a lazy approach will not work. Sure, there are times when an individual gets lucky and makes a quick and temporary profit trading a commercial EA, but more often than not the results are lackluster at best. I believe automated trading as a whole has been given a negative connotation because of the results of falsely marketed and over-hyped commercial EAs. Because of this, I personally refrain from associating the terms “Expert Advisor”, or “EA”, in the majority of my discussions with peers when it comes to algorithmic or automated trading. My purpose with this article is to shed some light on this hotly debated subject and hopefully offer some hope to aspiring automated traders!

With all this being said, what are your opinions on automated trading in the retail Forex market? Do you have any experiences you’d like to share? Let’s talk about them!