These days, automated Forex strategies are all the rage, but because there is an abundance of such strategies, it can be quite difficult to find one you can trust. Some people think that when you are placing your trades with the help of a Forex EA, you don’t need to know everything about the market, but such knowledge always assists you in making your decisions.
What is an automated trading strategy?
In the Forex market, automated trading strategies are those that are programmed into a system that executes the rules mentioned in the strategies for making entries and exits. The Forex trader must use technical analysis for this purpose, along with setting different position parameters like guaranteed stops, trailing stops, and open stops.
With an automated trading strategy, you can complete multiple trades within a short span of time, while factoring out the emotional decision making, which leads to the ruin of many traders. Since you pre-program the rules through the parameters, there are no chances of erratic decision making. Some automated strategies even let you monitor short-term and long-term trends and place your trades consistently.
Key things you need to consider
Here are some of the key factors you must look into before choosing a Forex automated trading strategy:
You should always pay attention to the description before you even think about using an automated Forex trading strategy. Your main objective is to figure out what the strategy represents and what rationale it is based on.
It is important to consider the key factors like breakout, trend, range, momentum, stop-loss, risk, and profit target, so you should always pay attention while going through the descriptions of different strategies.
Remember, each and every strategy is suited for a specific market condition and you must understand its significance. It is virtually impossible to find a strategy that is suited for all types of conditions, and you are better off using the one that works in a certain environment. Thus, to meet your objectives, you must identify the environment where the strategies operate at maximum efficiency and then use the scheme for a market with a similar environment.
Entry and exit signals
Entry and exit signals are factors that many Forex traders lose their sleep over. While it is vital to comprehend what logic the strategy is based on, you shouldn’t attach too much importance to every trade placed using that particular strategy. Remember, each strategy produces several thousand trades and you should look at the overall performance.
In order to review the trades, you can place the profitable trades on one side and the non-profitable ones on the other. Then you should find out the average winners and losers. Ideally, you should choose a strategy where the average winners exceed the average losers.
You should take at least 10 trades based on which you have to assess the performance of a strategy. Check if the result added or deducted pips and look for strategies that add the most pips.
When you have a sound understanding of the market condition, you can look for strategies that work best for it. Many traders skip this step, thus making a huge mistake.
Market conditions can be categorized into trending and non-trending. A market cannot be both at the same time. In a trending market, prices advance in a stable and confident manner. In such a market, you will notice a bullish trend with several higher lows and higher highs and a bearish trend with lower lows and lower highs.
When the market is moving sideways, ranges can form in it. You need to understand the perfect conditions that allow the automated trading strategy to generate profits, and then identify a market where it will be the most suitable.
Forex traders often do not pay attention to leverage and apply too much of it for a strategy that they have high expectations of. This usually happens when the traders only concentrate on the advantages of the strategy and do not take into account the potential losses that may occur. You should use an appropriate leverage amount in order to protect your capital during drawdown periods.
As a general rule, you should never use anything exceeding 10 times leverage. If you are new to the Forex market, a 5 times leverage is the maximum you ought to use. When you use smaller leverage, you don’t lose too much money during a drawdown.
The pitfalls of automated trading strategies
Some of the pitfalls of automated Forex strategies are as follows:
- Lack of intuition: Many people rely on their gut feeling while trading in the Forex market, but this is something that an automated program cannot do.
- Dedicated server needed: When you are trading using an automated strategy, you need the trade operation to be smooth and the run-time to be free from interruptions. For this reason, you need a dedicated server where your automated trading system will run.
- Implementation problems: Some automated strategies are hard to program into trading software. It takes some technical expertise to code fundamental and technical analysis into an automated system.
- Error handling: It is not possible for an automated strategy to always handle errors correctly and this can sometimes lead to losses. There is also the issue of moving the automated system to a different broker with a separate server because the strategy may not work there.
Automated trading strategies are for those Forex traders who have a lot of experience and technical knowledge. For you to be successful with such strategies, you need to be clear about your objectives. When used properly, these strategies can bring you huge profits.