Algorithmic trading is trading using so-called robots or advisers, mathematical algorithms that can predict the behaviour of a currency pair with high accuracy. Today trading advisers are all the rage because automated trading saves time, effort and nerves, does not require in-depth market knowledge and even beginners can use it easily. But can algorithmic trading be considered an ideal Forex earning tool? Let’s find out.
Algorithmic Trading history
Algorithmic Trading begins in the 2000s. Curious to relate, but initially trading robots were created not to get the maximum profit but to automate the execution of large orders. Initially, investment and mutual funds, banks, and institutional investors, who could not afford the extra risks in dealing with vast amounts of money, used such algorithms. Previously, it was necessary to contact particular companies, where very experienced and qualified employees specialised in opening orders worked. But work through intermediaries was very inconvenient, and when programmers developed automatic engines for opening transactions, complex orders became much more convenient. And although the commission for using such an engine was higher than the cost of the services of intermediaries, it was still beneficial.
Then the industry of trading robots began to expand, and special programs that were already intended directly for trading on Forex appeared. These are trading robots based on some profitable strategy.
Today, there are two types of algorithmic trading: mechanical and automated. Mechanical algorithmic trading is a way to trade when, based on market analysis, the robot gives trading signals, and the trader himself decides whether to follow them or not. Automated trading involves the complete elimination of the trader from the process of trading: the adviser does everything itself – opens and closes positions based on the algorithm incorporated in it.
Algorithmic trading advantages
1. Round-the-clock work
Obviously, the trader can not constantly trade. No matter how hardy a person is, he needs at least 8 hours for healthy sleep and rest. And if to add work, household chores, communication with family, etc., it turns out that there is very little time left for trading. But after all, Forex has favourable situations for making profitable trades, and most traders simply miss them. But the trading robot works 24 hours a day. It has no other business, and it does not need to take a break, so even if at 3 a.m. there is an excellent opportunity to open a good deal, the adviser will certainly take advantage of it.
2. No emotions
Every trader depends on emotions to a greater or lesser degree. Fear, insecurity, or vice versa, self-confidence, excitement, greed – this is what prevents to achieve success in trade. Algorithmic trading allows excluding the human factor because the automatic system acts exclusively according to the rules of the strategy on which it is based. In general, if there is the most disciplined trader in the world, then this is a trading adviser.
3. Wide opportunities
An ordinary trader is difficult to work with a variety of indicators and currency pairs; you have to choose 1-2 market assets and some of the most convenient technical analysis tools. Algorithmic trading greatly expands earning opportunities, since the robot can work with indicators and currency pairs in any quantity. The only nuance is that it is necessary to set the correct settings and adjust algorithmic trading strategies from time to time.
4. No experience is needed
Even those who still do not have sufficient knowledge in the field of trading can start earning with the help of advisers. After all, automatic systems do everything instead of a trader who does not have to delve into all the trading nuances.
Algorithmic trading disadvantages
But, of course, not everything is so smooth and simple, and algorithmic trading has its pitfalls as well.
First, the robot can not readopt. It works well in those periods when the market situation does not change, but as soon as something unexpected happens, the algorithm fails. When fundamental rather than technical factors come to the fore, the adviser continues to work in the same way, which is no longer effective under new market conditions. The adviser’s profitability decreases when unexpectedly good or bad economic data are published when political changes occur in the country, when natural disasters occur, which also affect the exchange rate, and so on. In these cases, a sharp human mind is much more preferable.
Secondly, it is not easy to find a truly reliable trading robot. According to statistics, out of the entire mass of offers on the Internet, only 10-15% are worthy, the rest is either non-working advisers or simply fraudulent schemes. Therefore, if you want to use a trading robot, then select only those offered by reliable developers.
By the way, there is a widespread opinion that paid advisers are a priori better than free ones: after all, quality always costs money. However, in practice, it is not so as usual. There are cases when free advisers, based on a fairly simple strategy with proper configuration give good results. And it also happens that expensive robots quickly lose the deposit.
And what is more important, many Forex brokers forbid trading with expert advisers. It is inconvenient to find a new broker seeking for an opportunity to trade with your algorithms. But it can be put right. For example, JustForex broker allows trading in any style and with any strategy.
So is it worth to use algorithms for trading?
Obviously, with all the advantages of advisers, you cannot fully rely on them, so experts do not recommend constantly trading in automatic mode. The best option is to combine manual and algorithmic trading and use robots as a hint and tool to diversify risks. Still, no mathematical model can completely replace a person, his mind, knowledge and ability to quickly navigate in a volatile market environment.