"Forex robots is a name given to algorithm based trading strategies. These are simple pieces of technical codes that trade based on the set of rules that are coded into the program. Whether you are trading on the MT4 platform or the cTrader trading platform; two of the most popular trading platforms in retail forex, you have the option to build and use a forex trading bot. Using a forex trading bot, traders can eliminate the need for having to sit in front of their computers and trade manually. There are different ways to build a forex trading bot. Some can be fully automated, while some forex trading bots can be designed to automate simple functions in a way that it alerts you to potential trading signals. This in turn can enable you to look at the markets and figure out if the trading signal is worth taking or not."
The evolution of the financial markets has brought about many changes. Technology has become one of the biggest drivers of innovation. From the old days of trading in the pit to manually calculating the various technical indicators, traders today enjoy the simplicity from this evolution.
As more and more trading pits close and trading now moved to electronic trading, the rise of robots or algorithms is but expected. Forex robots is a name given to trading algorithms that trade the currency markets.
These are simple rules that are coded in a programming language. It can either show trading signals or can be programmed to trade automatically by itself. Many large institutional players have invested billions of dollars into algorithmic trading.
In the current day, algorithmic trading is a major contributor to the markets. They help not just with raising liquidity but also trading volumes. On the flipside, you do have trading algorithms that can wreck havoc.
There are many instances about how algorithms were responsible for market crashes and so on.
As a retail trader with limited budget, you might be wondering on how you could use forex robots in your trading. Given that there is a high chance you are using the MT4 trading platform, or for that matter any trading platform, you have the option to automate your trading strategies.
A forex robot or a bot or an algorithm requires a bit of coding knowledge. Using this knowledge, programmers can code various rules. Once these rules are met, the algorithm can start to trade automatically.
There are many variations of the forex robots. For example, besides just following the rules, you could also program your algo to make use of position sizing and also incorporate rules of risk management.
Using algorithmic trading, you can also code your bots to hedge your current exposure and so on.
At the very basis of a forex robot is a trading strategy. A trading strategy needs to be mechanical in nature. Discretionary trading based forex algorithms are difficult to code and also require a bigger budget.
There are many automated trading strategies that one can use. For example, if you go to the MQL5.com market place, you have a section that is dedicated to forex trading algorithms or robots.
Forex Robots, Expert Advisors on MQL5.com
Some are cheap while others are expensive.
Traders make use of the forex algorithms to basically trade independently. This frees up a lot of time for the trader. But at the same time, the trading bot needs to be thoroughly tested.
How to build a forex trading robot?
By now, you must be keen to know how to build your forex trading robot.
The first step is to come up with a trading strategy. As we mentioned earlier, the trading strategy should be mechanical in nature. This enables the bot to follow the rules. You can also build a forex trading algorithm based on discretion. But it will not only be expensive but also quite a task to achieve such a goal.
Once you have narrowed down upon a trading strategy that is rule based, the next step is to either code the rules yourself or to hire a developer to do the coding for you. You need to incorporate all the aspects of trading.
From the risk management to setting your stop loss and of course the target levels. It is ideal that you test your strategy on a single currency pair rather than aim to conquer the currency markets.
Once the code is developed, it is time for testing.
The MT4 trading platform allows you to back test your trading strategy. A back test is nothing but a simulation on past price history. This will show how your trading strategy would have performed.
Many use the back testing method to fine tune their trading strategy. While this is acceptable, it should be limited. This is because, the more you fine tune your trading strategy in a back test, the lower the chances that the forex bot will perform with the same pace of returns.
This is also known as curve fitting. Curve fitting is where traders try to make their back tests look very impressive.
Besides back testing, traders should also forward test their trading strategy for at least a few months. This will show the real time performance. Of course, this forward testing must be done on a demo account.
For many, the amount of time it takes to come up with a forex bot to be thoroughly tested leaves them to cut corners. This is where you might end up with a forex trading bot that is not at all reliable.