What is an Automated Forex Trading System and How Does it Works

By | January 2, 2023

automated forex trading system

Also known as a mechanical trading system, an automated trading system gives traders the ability to specify trade entry and exit rules. Then, once programmed, you can run these rules automatically through a computer.

It is a fact that more than 70% of trade in the US bag it is the result of automatic trading systems. This strategy is also known as algorithmic trading. It allows investors and traders to translate exact entry, exit, and other management rules into an automated system, helping the computer to execute trades and monitor them.

Why do you need an automated forex trading strategy?

The answer to this question is in itself. This “automated” strategy frees you from many sleepless nights and hours of effort. In addition, this system executes transactions on your behalf in one or more currency pairs. Although you can do all of this manually, the involvement of this system reduces emotions in this situation and works more efficiently than a human could.

These trading robots can monitor the markets on any day or at any time. Not only this, but they can search for new opportunities for you while simultaneously executing your trades.

Important Steps to Build an Automated Forex Trading System

Since these systems have so many advantages, we understand how tempting it is to automate your own forex trading strategy.

So here are some important tips to automate a forex trading system.

Creating a Detailed Business Plan

If you are in forex trading, you know how important it is to have detailed information. Commercial plan. With this, you will be able to identify your objectives and define how your automated system will achieve them. Your plan should consider the markets you want your system to trade in, your risk/reward ratio, the time it will run, and the strategy you will use.

System design

Now that you know what your system will do, it’s time to decide how. In this step, you will determine how your system will detect an opportunity and what action will be taken next. For example, you can have your system perform a transaction or notify you about it.

To simplify the design, consider your usual indicators and tools for identify trends, such as moving averages and ROI, and your usual way of trading. Also, you should base your automated forex trading system on your knowledge of trading, financial markets, and technical analysis. Therefore, you obviously need to know a lot about this business field.

Choice of risk management tools

This is undoubtedly one of the most important parts of the entire procedure. Depending on the platform you are using, you will have three types of stop lossis: basic, guaranteed and final.

the basic stop closes your position as close as possible to the specified price level. That being said, this position could sometimes be worse than the price charged. But this only happens if the market is facing rapid changes or if there are gaps.

As the name suggests, your position will always be closed at the specified level if you go with the guaranteed stop. However, whenever the stop is activated, you will have to pay a small amount as a premium.

Last but not least, the final stop it is used if you want to track positive price movements. This is beneficial because it guarantees profit. But naturally this also does not guarantee the stop level, so it can slip if the market changes quickly.

Alternatively, you can use a limit for this purpose. A limit closes your trade automatically if the price moves to a desirable level. A limit gives you what a stop can’t because when triggered, a limit will close at the price you specified or even better than that.

turn it into code

If you’ve planned and designed your system, it’s time to turn it into code. First, choose a platform and determine what coding language you use. Your design should complement the platform you will be using. Also, it’s important to know what can and can’t be converted to code. So you would need a decent knowledge of programming and its platform.

Building an automated system or hiring a developer

This step can be intimidating, so we recommend hiring a developer if you don’t know how to code. With a professional, you’ll get code with minimal issues in minimal time.

Building an automated system

Backtesting and refinement

Now that you have your system ready to go, it’s best to backtest it. Backtesting is to an automated system what a test drive is to cars. Backtesting is simply testing your system using historical data and setting it up for the best results.

Backtesting is important whether you build your own automated trading system or just buy a stock system. This step shows you how well the system will work without asking for any investment.

Example of backtesting results

Example of backtesting results

Although backtesting is a great tool for determining the efficiency of your automated forex trading system, you should be aware that it has a shortcoming. Results from static data (which you use for backtesting) may not always represent what will happen in a real market situation. In the case of static data, several factors, such as liquidity, are not taken into account.

automated forex trading system Resume

The steps mentioned above will surely give you an efficient automated forex trading system. However, don’t be fooled by the word “automation”. We recommend that you continue to review your system even after you implement it.

Market conditions keep changing and many problems come without alerting anyone. And even the best automated trading system may have some restrictions in these situations.

Also, your trading system will work solely based on your technical analysis. However, it will need your help to adjust to the effects of economically significant events and market conditions that only a human being can assess.

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