FxPro Education
More than a quarter of trades with FxPro are executed automatically by computer programs. These types of trades are known by many terms, including expert advisors, algos and robots. Many more trades are supported by systems that provide buy and sell signals (semi-automated trading). may sound daunting, but this does not mean that FX trading is only open to rocket scientists or computer programmers. There are solid reasons why many traders choose to automate their trading strategies, or use someone else s strategy in an automated form. The aim of this presentation is to explain why. The main reasons why FX lends itself to such automated trading techniques are: It is a market dominated by flows, and less so by whether a currency is under or over-valued in the very short term. This makes trends, levels and technical factors more important for trading. These technical factors change quickly and lend themselves to automation vs. more subjective factors for valuing stocks which often change little in the short term. Many trades can be executed in a short space of time, much faster than can be completed manually. The deep liquidity and tight spreads of FX markets makes this potentially profitable. Strategies can be consistently back-tested to see how they would have performed in the past. This is harder in markets with less liquidity (good price data). Automation removes the emotion from trading which, in the fast paced world of FX, can lead to common errors such as running with losses for too long and taking profits too early.
Strategy example Here s a simple example, illustrated graphically. The chart is the EUR/USD exchange rate, with each green candle representing a 5-minute period. The red and blue lines are the 5 and 10 period moving averages for the exchange rate, so the average over the past 25 minutes and 50 minutes respectively. A simple strategy could be to buy when the shorter period (red) crosses above the longer period (blue). This is an example of a momentum-based strategy, where the rate of change in the price is getting stronger, indicating a greater proportion of participants either entering or exiting the market In the eight hours of this chart, this strategy would have resulted in 10 trades (5 buy / 5 sells). How would you go about putting such a strategy into practice? There are several approaches. You could write the code in your trading platform, using MQL4 in MT4 or calgo in ctrader. This is really for those with prior experience. There are plenty of forums and other online communities where traders will swap and discuss different trading strategies, so these can help when building a strategy. Both MT4 and ctrader have a library of programs available. You can simply enter the parameters of your strategy, so for our moving average example, the type, the length of the two periods, the volume of orders and the time-frame. This process simply adds your chosen parameters into the programming code, allowing you to change them in a more user-friendly manner. You can buy expert advisors (for MT4) and other systems online. But as with all such purchases, you need to shop carefully and read around on forums and other sites for reviews. Of course, all will make elaborate claims on how much profit can be made, but not all can be true.
Strategy example The next thing is to back-test the strategy, to determine how it would have performed historically. Back-testing a strategy is important to determine how it would have performed, but also as a way of improving it. Both ctrader and MT4 provide simple tools to back-test an automated strategy. Any back-test should take into account the costs of trading, so the spread you are paying and any commissions involved. You should then use the results to improve the strategy, changing the parameters to determine how they impact performance. No strategy will provide consistent returns in all conditions, so ask yourself whether there are times when it does not work. It is interesting that the strategy above shows several small loss-making trades followed by a larger winning one. Manual traders are not good at coping with this situation but automated trading removes that emotional block. There are more losing trades, but the winners are bigger. Taking it further So presuming you ve found a strategy and back-tested it, here are some things to consider when implementing it. Understand the risks and size your positions accordingly. During the back-testing, what was the biggest loss (or draw-down) that the strategy incurred? You should take this into account when deciding the size of your real positions. You should only size trades so that you would lose 5-10% of your equity if such a loss was to occur. This makes it manageable to incur several losing trades in a row, which is part of trading and was also a feature of our simplified example. Always ask questions. Complacency in thinking that a consistently winning strategy has been found has been the undoing of many traders, both small and large. What works in certain market conditions may not work in others. If your strategy does suffer periods of bad performance, ask yourself what the common factors are (time of day, events etc.). See if there are ways you can account for this in your strategy, or just consider not trading during such periods if you can pin-point them. Keep your eyes open. is always changing as new technology brings in new possibilities. Always keep your eyes open, on forums, industry websites and social media for the latest developments, which will help you develop your trading style and learn how to be a better trader.
Disclaimer & Risk Warning Disclaimer: This material is considered as a marketing communication and does not contain and should not be construed as containing investment advice or an investment recommendation, or, an offer of or solicitation for any transactions in financial instruments. Past performance does not guarantee or predict future performance. FxPro does not take into account your personal investment objectives or financial situation and makes no representation, and assumes no liability to the accuracy or completeness of the information provided, nor for any loss arising from any investment based on a recommendation, forecast or other information supplied from any employee of FxPro, third party, or otherwise. This material has not been prepared in accordance with legal requirements promoting the independence of investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. All expressions of opinion are subject to change without notice. This communication must not be reproduced or further distributed without prior permission of FxPro. Risk Warning: CFDs, which are leveraged products, incur a high level of risk and can result in the loss of all your invested capital. Therefore, CFDs may not be suitable for all investors. You should not risk more than you are prepared to lose. Before deciding to trade, please ensure you tunderstand the risks involved and take into account your level of experience. Seek independent advice if necessary. Ltd is regulated and authorised by the CySEC (license no. 078/07) Ltd is regulated and authorised by the FSA (registration no. 509956) FxPro (Australia) Pty Ltd (ABN 68 143 740 603) is regulated and authorised by the ASIC (AFSL no. 405750)