Trading robots are becoming increasingly popular among many day traders who want to achieve substantial returns in the market. While some traders have become successful using bots, many of them have not. In this article, we will look at some of the important rules you must always follow when using a robot in forex trading.
What is a forex trading robot?
A trading robot is also known as a bot or an expert advisor (EA). It is software that is built based on trading principles to do several things. A bot can send you a signal when certain market conditions are met, open a position, and close a position. Expert advisors are widely used by quantitative traders and hedge funds and also a select group of day traders.
How forex robots work
Expert advisors work in a relatively simple way. Suppose you are a day trader who focuses on oscillators like the Relative Strength Index (RSI), Stochastic Oscillator, and the Commodity Channel Index (CCI). In this case, your trading strategy could involve buying a currency pair when it gets to the oversold zone and shorting one when it moves to the overbought level.
Therefore, if you use this strategy as a manual trader, the chances are that you spend a substantial amount of time waiting for these conditions to happen. At times, this could take days before a buy signal emerges. Also, these signals could emerge in some currency pairs that you are not looking at.
A forex bot is simply software that automates all this. It will scan your preferred currency pairs and identify these patterns. After that, it will either send you an email or desktop notification informing you about the signal. Alternatively, based on the design of the algorithm, it can initiate a trade and input all your risk management features. It can do that when you are there or when you are not.
Most professionals recommend the former type of robot to new traders. After sending a notification, they can look at the conditions and decide on whether to buy or not.
While robots are useful in trading, the reality is that most people using them fail. For example, a new trader will see a bot being advertised online and buy it. Without wasting time, they will rush to use the bot in their account. In this case, the chances are that they will lose their funds.
Rules for using bots
There are three major points to keep in mind when dealing with trading robots. We will explain each one in its turn.
Be careful before you buy
As a day trader, you have two main options to implement a bot in the market. You can either buy one or build it. To build a robot from scratch, you will need to have many years of successful trading behind your back. This will help you have a good understanding of how the market works. It will also help you come up with a good strategy that you have tested over the years.
Most importantly, you need to have in-depth knowledge of programming. Obviously, you will need to translate your strategy into a piece of software known as a robot.
Therefore, since most people don’t have experience in these two, the obvious strategy is usually to buy a prebuilt robot. One can buy a robot directly from a developer, or they can use a marketplace. The most popular place to buy a forex bot is the MQL5 and MQL4 platforms that house thousands of robots. Also, one can buy the robot directly from a developer.
Regardless of the route you take, we recommend that you always be careful about the bots. This is important since a bot can cost more than $1,000. Therefore, you should do some research, including reading the reviews, using a demo account, and verifying the claims.
Always backtest a forex robot
The second rule is that you should always backtest it. This is simply the process where you use past data to predict how the robot will perform in the future. It is simply a simulator. Fortunately, this is a relatively easy process since most trading platforms provide a feature known as a strategy tester. After entering the parameters, the tester will run the process and show you how the robot would have performed in the past.
To run a good backtest, ensure that you do several things. First, test the robot on the currency pairs that you trade regularly. For example, some robots will work on currency majors like the EUR/USD and GBP/USD and underperform on pairs like USD/TRY and USD/ZAR.
Second, ensure that the timeframe is right. Most forex robot developers target different types of traders. As such, a robot that is built for the 30-minute timeframe will underperform when it is tested on a daily timeframe.
Finally, ensure that you use the right testing period. You can decide to test a five-year chart or a 1-month chart.
Therefore, before you use a robot you just created or bought, take it through several weeks of robust testing to see whether it works.
Use a VPS
The financial market is highly-dynamic and fast. For an ordinary trader, using the default platform provided by a broker is enough. However, if you want faster execution, especially when you are using a forex robot, we recommend that you use a Virtual Private Server (VPS). This is a hosting plan that ensures that you get quotes faster.
Indeed, in institutional trading, many large players pay millions of dollars every year to ensure that their servers are as close to the exchanges. Since retail traders can’t afford all these funds, they pay companies to provide the hosting. A VPS can cost as little as $10 per month. We recommend that you use them to implement your trades faster.
Using a forex trading robot can be a good thing and highly profitable for you as a day trader. However, it is also a risky thing that has cost many people a fortune. In addition to these rules, others that you should use are always having a stop loss, sizing your trades well, and limiting your leverage.