Over eighty percent of forex trading is attributed to robots. The High-Frequency Trading (HFT) industry expanded its activities in recent years as computing power grew exponentially. But HFT trading focuses on the ninth or so decimal of a currency pair’s quotation, making trades impossible to trace by the human eye. However, retail investors spotted the opportunity provided by automated trading and quickly joined in.

Nowadays, we can talk about a sizable part of retail trading belonging to automated trading. Platforms like MT4 allow investors to run trading robots, called Expert Advisors, on all currency pairs. Effectively, the buying and selling take place automatically, and from specific levels according to the underlying strategy.

A trading algorithm is a formula-based system that buys and sell relentlessly, for as long as the market is open and trading conditions are met. The term, “algorithm” is taken from the name of a Persian mathematician, Al-Khwarizmi, who lived around the year 840 and was a role model for Fibonacci.

Advantages of trading with a robot

The main advantage is that a robot never gets tired. It trades all sessions, day and night; as long as a viable trade exists, it will execute it.

Investors can automate a strategy and back-test it to see how it performed in the past. Also, an automated trading strategy can be optimized in such a way as to perform best on different currency pairs. As trading conditions differ from currency pair to currency pair (e.g. spreads, liquidity), settings can be adjusted to ensure optimal conditions.

Another advantage of trading with a robot is a total detachment from an emotional perspective. The emotional rollercoaster associated with trading is avoided when investors know the robot will manage all the risk. But automated trading has its drawbacks too.

Disadvantages of trading with a robot

Firstly, strategies can have varying results with different forex brokers. In other words, the same robot running a strategy on two or more different brokers can have different outcomes. This discrepancy is due to the broker’s specifics; for instance, server time. If the robot operates on daily closings, the closing of each candle will differ depending on where the server is located (GMT, EST, etc.). Therefore, under one setting the strategy may prove effective, and under another, ineffective.

Secondly, the forex market is known as being extremely volatile. At times, it moves so fast that even the most accurate brokers have a hard time filling orders at the intended prices. Slippage is a reality and when trading with a robot, investors need to consider the potential differences between back-testing results and real results.

Running a trading algorithm also requires a dedicated server as the trading platform must stay open at all times. VPS (Virtual Private Server) services are available under a monthly subscription and are just another adjacent cost to investing.

Take-aways:

  • Using an Expert Advisor provides distance from the emotions associated with investing.
  • Trading platforms need a VPS service to stay open at all times.
  • Slippage may influence back-testing results.
  • Results may differ from broker to broker.