A large portion of nearly all trading in financial markets is conducted by computer programs and devoid of human operators, except from the occasional tweaks and optimizations that humans may employ from time-to-time, whether from an amateur trader or a quantitative analyst fresh out of college who landed a job on Wall Street – to the highly experience programmer with years of algorithmic trading experience.
Financial markets are continuing on to ride the technology wave, like many other industries, and converging towards becoming more and more automated leading to the rise of forex trading robots. This article will explain what forex trading robots are, and how using electronic access to financial markets such as foreign exchange, can lead to automated trading for the retail investor or online trader, using such programs and tools, including common challenges facing market participants.
Rise of the Forex Trading Robots
In the professional world of finance, the use of Forex trading robots is commonplace in everyday business for nearly a decade already, such as on the trading floor of an exchange or an online brokerage, or in a proprietary trading firm.
Forex trading robots are everywhere, and not just in forex markets, for example, in the U.S. regional stock exchanges a large market-share of daily trading volumes are entirely driven by trading robots, as markets have become more easily accessible by electronic means.
Electronic Access to Markets Provides Means to Automated Trading
Traders can setup robots and configure them to execute trades via an API connection using their own proprietary programs and network infrastructure, often co-located close to the exchange or brokerage, or use programs found within the trading software and platforms offered by a 3rd party or the executing brokerage.
As a large number of clients look to find free forex trading signals, while reviewing and comparing forex trading software, in order to find the right forex trading platform that would best suit their needs, forex trading robots are often appealing, as the idea of finding a magic algorithm, or the holy grail of forex trading robots, can attract enough curiosity to merit further review.
Common Misconception: Forex Trading Robots Always Win
One major challenge is that the initial appeal of forex trading robots to the inquiring trader often contain an unbalanced risk that is hidden, with regards to the expectations of the program, where the focus may be overly weighted on the potential benefits of a particular forex trading robot, and not on the potential risks.
This phenomenon can occur for a multitude of reasons, for example, since trading robots become mostly automated, and are based on some systematic trading methodology, they can be tested across a number of time periods and instruments pretty easily. In addition, the designers of the robots, or those who have programmed using the code that runs the specific strategy including conditions that trigger actual trades, may only be interested in selling their program, without regard to the eventual results that the system may produce, or even for those who think they have devised the best automated trading system, the expectations may be greatly exaggerated, and the risks under-emphasized.
In addition, sometimes the programs are tweaked over the historical prices, a process known as optimization, in order to find the settings that would have been most optimal to produce a desired risk-adjusted return, which as will be revealed below can lead traders to unrealistic expectations.
Beware of Over-Optimized Forex Trading Robots
Forex trading robots run from within an operating system, or program or may even be non-application specific, but many use some computer language or syntax code that apply a set of programmed rules, and conditions that must be met, and using other various algorithms or criteria to sift through and analyze market prices for a trade to be triggered.
After initial design, these programs are often back-tested on historical results to see how the forex trading robot “would have” performed, if such settings were applied at the start of the time period – in real life.
Such hypothetical scenarios, create a set of results that deserve adequate skepticism, because the process of optimizing already knows which way the market will move in the past, because the results are already available (and have already occurred). The only way to back-test a trading system without curve-fitting the data, is to do it with out-of-sample historical prices, which means the program will run with the parameters that it has been configured with, without knowing the upcoming market conditions or when and where prices will move.
Forex Blog recommends WorldWideMarkets (WWM) for traders looking to find and research forex trading robots. The MetaTrader4 (MT4) platform, available from WWM, provides access to the signals market, where traders can review 3rd party Expert Advisors (EAs), as well as develop and deploy their own, in a live forex trading account. In addition, WWM offers the ZuluTrade platform which also has automated trading capabilities, combine into a social network environment, where clients can engage in copy-trading.