Why Trading With a Forex Robot Works

April 29, 2013 01:26 AM

To answer the question of why trading with a forex robot works, it is important to first understand what exactly a forex robot is and what it represents.

In simple terms, a forex robot is no more than a sophisticated trading system that has been designed to trade in an automated, mechanical way. And it represents the future of trading, since it combines the latest in technology with the traditional concepts of successful trading.

For some, the term ‘bot’ can have negative connotations since the word conjures up images of scams or mysterious algorithms. Such feelings are no doubt made worse by the media who love to place the blame of market crashes and meltdowns at the feet of high frequency trading systems. Indeed, black box systems are often blamed for the crash of 1987 and held responsible for the ‘flash crash’ in 2010.

Of course, the reality is very different to what the media like to portray and in this case, they are undoubtedly wrong. You see, trading robots come in all different forms and are no more at fault for a market crash than anyone else in the market and that includes the money spinning central bankers.

MetaEditor – The MetaTrader programming screen

MetaEditor screenshot

The truth is, forex robots work because they benefit from a prevailing human weakness that prevents the majority of people from making any money in the markets. You see, humans lose money in the markets because they are genetically programmed to act on emotions, such as fear and greed.

Indeed, when markets are imploding, it is fear that generally takes over and causes traders to sell everything they own, and when markets are shooting up, it is greed that causes traders to buy more at ever increasing highs.

In some scenarios those emotions are good for us and are the same emotions that would have caused our ancestors to run from danger or to gather up food when it was in abundance. However, in trading, it is precisely the opposite approach that is needed in order to turn a profit. In fact to succeed at trading, a trader needs to act directly against his or her natural responses.  This is not very easy for the majority of people to do and it is this reason why automated systems, or bots, by taking the emotion out of trading, can vastly outperform the human touch.

Objectivity

Another reason human traders fail is that they are often unable to see the market in objective terms. For example, how many times do we hear traders talk about the markets bouncing off trend lines or hitting resistance levels. These levels are often highly subjective and are based on how an individual trader sees the market. Sometimes, traders will even give the market human traits, saying things like ‘the market is undecided’ or the market is ‘wrong’. In truth, the market is the market and it can never be wrong. 

In fact, the tendency for humans to see financial matters less than objectively has been shown through a number of studies. One famous example shows that if you offer a person $1000 today or $1100 in two month’s time, they will nearly always take the $1000 now. However, if you were to offer $100 now or $200 in two month’s time they will take the latter option. Financially, there is no difference between the two, but all the studies show that humans often make investment decisions that are less than logical.

The fact is, the more objectively you can analyze the markets the more chance you have of making a profit and by using a forex robot, you will always be trading the market with an objective view. By testing your bot over as many scenarios as possible you can find the settings and indicators that really work.

Millions of Permutations

Another reason why forex robots tend to work is because they have usually been subjected to scientific tests that have verified the system over hundreds, if not thousands, of different combinations.

For example, say you believe that markets operate in trends and you think that when a 10 day exponential moving average (EMA) crosses over a 20 day EMA, it is a great place to buy the market. Well, by designing a robot, not only can you test your initial hypothesis but you can optimize it to test all sorts of different permutations. 10 day EMA’s, 11, 12, 15, 20, 50 day- the possibilities are limitless and the results can be considered after just a couple of minutes.

Many of the best performing EA’s have been designed in this way and have been tested over several years of historical data. Developers with many years of experience have carefully tested all sorts of different indicators and settings to find the combinations that work best.

For example, which periods work best for Bollinger Band strategies, which markets perform the best and what levels of risk result in the maximum amount of profit. Modern developers also take analysis a step further and use statistical processes such as walk-forward and Monte Carlo analysis to make sure their systems are as robust as possible. Most of these EA’s can be found on this site.

Speed of Execution

To trade forex profitably therefore, a discretionary trader needs to be able to trade with the trend, look out for reversals, manage his risk, keep an eye on his emotions, stay focused, and watch out for unexpected events. If that isn’t enough for the average person to deal with, all trading decisions must be made at lightning fast speed. Because if they are not, then it’s likely they will be beaten by a faster trader. Forex robots are able to do all this and more, in the same time it takes to add a simple sum on a basic calculator.

There are lots of ways to trade the forex markets and just as many ways to lose money. Forex bots, on the other hand, work quietly and calmly in markets that are constantly changing. And what if you can’t find a robot to meet your needs? Well, you can always write your own.


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