Automated trading became a reality recently. With faster computers, manual Forex trading started to lose its significance.
Statistics don’t lie. Nowadays, over eighty percent of orders belong to automated trading.
Moreover, the percentage is on the rise. Does this mean that the manual Forex trading will disappear? Or, that the human’s touch in the financial markets will no longer exist?
Unlikely! Because humans program the trading bots, the human touch will still exist.
All traders use automated trading. Even those that aren’t aware of it do so.
For example, have you ever placed a pending order? If it got filled, that is automated trading.
Or, have you set a take profit or a stop loss order? The same answer applies here too. What’s the human input then?
In this article, we’ll look at the pros and cons of algorithmic trading. Moreover, we’ll touch the basics of manual Forex trading and why it matters still.
We’ll cover, among other topics:
- What is automated trading?
- High-frequency trading and price action
- Different types of robotic trading
- What is an expert advisor
- Costs associated with an auto trading robot
- The importance of back-testing
And much, much more. Above all, at the end of it, you’ll learn that human traders follow robots. Not the other way around!
With the progress made by Artificial Intelligence (AI), the market will change even more. Anyway, it changed dramatically in the last few decades.
Since early 1900, with the frenzy in the United States stock market, the trading arena changed. Not only that there are many more markets to trade, but the forces involved changed too.
But why do traders need both manual and algorithmic trading? The answer comes from the strategies and the timeframes used.
The History of Manual Trade
Personal Computers (PC’s) exist since a relatively short period. Now we cannot imagine looking at a chart on anything else than a computer.
But, that’s only the last few decades’ reality. In fact, in less than twenty years, the industry leapfrogged to unthinkable technologies.
Since the introduction of the stock market tape in the United States, a new era began. Suddenly, traders had an idea about live prices.
No longer they needed to wait for the next morning’s paper to check the market. They were just there, on tape, with symbols changing every few minutes.
And so, speculation began. Tape reading was a phenomenon involving patterns already.
Trading was manual. First, the trader filled a ticket.
That is, with what to buy or sell short. Second, they called a clerk.
Finally, the clerk placed the order. Minutes later, and sometimes more than that, the confirmation came.
Hence, for a simple trade, more than two persons needed to make it happen. Not anymore.
Technological advances changed not only the market. But also, the way the market trades.
Back in those times, it was only the stock market available for speculation. Automated trading was still a dream.
But, the benefits of free trade didn’t get lost in time. To this day, discretionary trading has many followers.
Moreover, various trading theories only allow manual Forex trading. Discretionary trading, as it is called, has many benefits over automated trading.
One, for example, comes from the ability to avoid consolidation areas. And, sometimes, trading just doesn’t fill right.
Having no position is a position. But, an automated trading software won’t know how to make the difference.
Trading Theories and Strategies for Manual Forex Trading
Some trading theories didn’t get lost in time. That is, because of manual trading.
If you ask me, automated trading is dull. I agree with the fact that the aim is to make money.
Alright! But managing trading algorithms has more to do with coding and programming, rather than with market knowledge.
Traders that wanted to keep their independence used trading theories that work just fine on the Forex market too. Think of the Elliott Waves Theory, Gann Theory, Point, and Figure, as only the most representative ones.
All of them have an aura of mysticism. There’s not a straight rule that governs trading.
Because of that, programming them becomes difficult. For example, in his last days, Elliott worked on the theory now famous.
But, one can’t program it. Attempts were made, but programmers just don’t understand the concept.
The same with the Gann theory. Astrology and numerology in Forex trading are not that easy to program.
Plus, trading theories claim to decipher a market. Not only the current and past prices but also the future ones.
For that reason, manual Forex trading will survive the test of time through the trading theories practitioners. Trading theories offer another advantage, too.
They let people think. Therefore, a trade with the Elliott Waves Theory comes at the end of a logical process.
Or, finding the defining range with the Point and Figure theory follows the same process. There’s no one measure fits all. Hence, programming them just doesn’t work.
Maybe AI and future developments will handle such problems. Until then, the human touch to markets is here to stay.
However, trading theories and strategies based on them, address the swing trading and investing communities. What’s the need for automated trading if the analysis comes from the more significant time frames?
Manual Forex Trading in the 21st Century
Retail traders have a short-term oriented goal. They want to profit from the market swings, indeed.
But, they have no patience. As such, medium to long-term trading strategies doesn’t work with them. Or, with most of them.
Because of that, they don’t look at bigger timeframes. Their analysis focuses mostly on the hourly and lower timeframes.
Scalping is the right terminology for it. It refers to traders looking to profit from short and very short-term market moves.
However, a growing part of traders looks at the Forex market as an investment opportunity. They avoid fundamental news and just trade on levels.
Swing trading happens when traders keep positions open for a longer time. Typically, trades take between one day and a few weeks until closing.
The only automated trading part in swing trading comes from the pending orders used. That’s it.
On the other day, investing almost exclusively uses manual Forex trading. Because the decision to invest in a currency has a different time horizon, the actual execution losses its importance.
Not once, investors jump on a trade way ahead of the market’s turning point. Moreover, they scale into a position.
That’s done manually too. Because they use macroeconomics and fundamental arguments to back up a trade, automated trading doesn’t make sense for these traders.
Plus, there’s one aspect no one thinks of. Humans always supervise robots.
When critical economic events (e.g., referendums, elections, etc.), many traders chose to shut down algorithmic trading strategies. How come?
The answer comes from the unknown. No one knows how the market reacts. As such, no one knows how the trading bots will respond too.
Automated Trading in the Forex Market
Perhaps no other financial market is subject to algorithmic trading like Forex market is. Because of electronic trading, the financial system as we know became vulnerable.
Automated trading appeared for a simple reason: faster execution. Experienced retail traders remember the times when Forex brokers offered only four-digits accounts to trade.
In time, with new technologies (e.g., ECN and STP), that changed into five-digits. However, the notion of a pip in Forex trading still refers to the fourth decimal.
But, for algorithmic trading software developers, that was an opportunity. While the manual trader can’t judge and trade on the 5th decimal, a robot can.
And from that moment, the industry expanded to unprecedented levels. To have an idea, the High-Frequency Trading (HFT) industry nowadays aims for the 6th or even further decimals.
Super-computers buy and sell thousands of trades per second. Because the market moves continuously, the opportunity exists at every corner.
For that reason, many argue that the HFT industry altered price action. That’s not the case, as the trading bots deal with trading beyond human comprehension, as explained earlier.
The quant industry became important too. Mathematicians and programmers around the world joined forces to program complex robots to beat the market.
Speed, as well as execution, matter the most. The algorithms use complex processes to buy and sell currencies. And, the quant firms must keep up with the latest changes in the industry too.
Moving forward, to fully understand the importance of automated trading, one needs to split it into two parts: HFT and quant industry, and retail trading.
Like it or not, the two differ from many points of view. The first enjoys more money and invest heavily in new technologies.
Retail traders just want a robot to do the work. Or, an expert advisor to make money for them.
Why Using Trading Bots?
The aim is to make money on both sides of the market. Who cares if the market rises or falls?
Because of that, the first one to trade has a competitive advantage. Speed matters the most.
Yes, that’s the main reason for automated trading. At least, on the HFT and quant firms side.
The first place to spot algorithmic trading is when using the economic calendar. Or, when important news comes out.
Programmers use the standard interpretation and the forecasted number of program algorithms. As such, trading robots will buy or sell based on the actual number.
Take the NFP release, for example. A bigger than expected number leads to a higher dollar.
And, a lower one, to a weaker dollar. Hence, we know the reaction in advance.
Moreover, we know the forecast. Therefore, all we need is the actual number.
But if traders know the first two, the third one doesn’t matter anymore. The battle for profits moves to a different stage: speed of execution.
Ever wondered why a currency pair reacts so violently to the economic news? Robotic trading has the answer.
But robots read too. The financial community uses a scripting language to refer to market developments.
That’s especially true in the case of central banks’ monetary policy changes. Hence, programmers developed trade bots to read the news.
The Federal Open Market Committee (FOMC) Statement is the perfect example. At its release, the dollar reacts like a madman.
But the statement is a document. How do robots deal with it?
First, programmers load the previous statement. Second, the robots will buy or sell the dollar based on the changes on the new statement.
It takes little time for the robots to react. That’s the power of automated trading in today’s Forex markets.
Trade Bots for Retail Traders
There’s one more aspect to mention before talking about expert advisors. Quants use sophisticated technologies to “glue” algorithms to newswires.
Big news conglomerates like Reuters, DowJones, Bloomberg, etc., transmit snippets throughout the trading day. Robots learn what to read and how to react to such news.
For this reason, sometimes the Forex market moves, and no one knows why. That is until people check the latest news. Usually, they find out what happened after the market already reacted to that news.
Retail traders have their saying in automated trading. While manual Forex trading still works, retail traders can use robots too.
Any trading platform allows Expert Advisors. Or, robots to automatically do the trading for you.
The MetaTrader4 and five platforms even offer the Meta Editor option. All you need is coding knowledge, and you’re off to a new world.
The problem with Expert Advisors comes from historical data. Because they typically aim for small profits, traders apply them on lower time frames.
As such, it may happen that the market conditions were favorable for that strategy for a while. However, when they change, the Expert Advisor won’t work anymore.
Also, trading conditions differ from broker to broker. On some brokers, the strategy works like a charm.
Only upload the Expert Advisor and let it trade. However, on some others, the same robot with the same strategy fails.
There are a plethora of reasons why. One comes from the trading conditions (spreads, etc.). Other comes from the servers’ time zone. And so on.
Anyway, many retail traders at least once played with the idea of using an Expert Advisor to handle their trading. But the whole concept was shaken to the ground on one crazy January.
The SNB 2015 Event – a Forex Auto Trader’s Nightmare
In fact, the entire industry almost disappeared. For years, one of the easiest ways to make money was to stick with the Swiss National Bank (SNB).
In a desperate move to counter the CHF appreciation, the SNB reacted. It pegged the EURCHF rate to 1.20.
In other words, it vowed to keep the rate above that line in the sand. For as long as it takes! No matter what!
As it turned out if it takes lasted a few years only. However, retail traders (and not only), bet on the SNB word. And, acted accordingly.
After all, why messing with one of the most influential central banks in the world?
Trading robots and Expert Advisors bought the EURCHF on every move lower towards the 1.20 level. The peg lasted, and all worked like a charm.
Until the magic stopped! On January 2015, the SNB announced it would drop the peg. In an instance, there was no market anymore on all CHF pairs.
Now, before saying that traders have a stop loss, think twice. The Forex broker can execute it only IF there’s a market.
But, it wasn’t. Instead, a few minutes later, the market appeared at 0.85 or something.
The EURCHF pair dipped thousands of pips in a blink of an eye. No Expert Advisor can get you out of such a mess.
As such, many traders paid a dear price. The next morning, they received a call, with the brokers asking to come up with the money to cover the difference.
Automated trading you say?
In any case, the industry survived. In fact, not only that it survived. It flourished.
Today, more and more people use robots to execute a trade. Expect the trend to continue.
With the crypto universe emerging, expect millennials to come up with new ways to automated trading. But, manual Forex trading still has its place.
Most of the retail traders have an obsession. That is, to always be in the market.
For this reason, they think that using an Expert Advisor will cover for the time they can’t watch market. This is true, but it only hurts a trading account.
In the end, it will lead to disaster, as overtrading hurts a trading account. It is only a question of when.
The advantages of free trade strategies overcome automated trading ones. But, no one can deny the potential of using an Expert Advisor or another trading algorithm.
Providing the backtest trading strategy gave promising results, an Expert Advisor can complement a trading portfolio.
Just like diversifying a trading account with different strategies, traders can use both automated and discretionary trading. As such, they’ll end up benefiting from their advantages.
To sum up, automated trading evolved spectacularly in the last years. However, only together with manual Forex trading, the traders will profit from all market moves.