Broker to Trading

Forex algorithmic trading is trading currency pairs using automated trading strategies or algorithms executed by computer programs. To do so, the trader needs an account at a broker which offers Forex trading and a platform or platforms which support automated trading. Such platforms include MT4, MT5, cTrader and JForex. All these platform allow the trader to run automated trading strategies (systems) or algorithms (also known as robots). The broker may also allow the trader to plug directly into their servers via the trader's own front end, using a FIX API.

Do automated trading systems work ?

Automated trading is a way to run trading strategies in behalf of the trader. It should not be assumed that any system will work, even if it has been backtested on past market data and generated successful results. Automated trading can be used when it would be impractical for the trader to trade, for example running a strategy which applies an indicator rapidly and repeatedly. Some things computers are better at than humans. The problem is that human traders can exercise discretion and judgement, in a way computer programs cannot. Thus a computer program will tirelessly execute a strategy 24/7, where a human trader might tire or make mistakes or be unable to spend time at the computer. However the capacity of the human trader to reflect on the market and adjust their trading is missing, though it is possible to tweak a strategy and try to increase its performance between runs.

Just because a system has worked in the past does not mean it will work in the future and how it performed may not repeat itself in the future. A feature of trading systems is drawdown, where the trading system incurs losses. It may work out in the end, but it also may not, even if adjusted. One way to consider this is to think about how a human trader trades. They may apply a strategy and find it works sometimes and does not work at other times. They may adjust the strategy to market conditions and it may work, but it also may not work either.

So a system may be a more practical choice for some kinds of trading, but because it is more practical it cannot be assumed that it will work, and the power of the human to exercise discretion as the trade develops is missing. The advantage is that discretion itself can become problematic, as the trader makes human errors in exercising it. These errors can be seen emerging from trying essentially to trade like a computer program. In these cases there can be an argument for using trading systems, with the caveat that they may not work, any more than any trading strategy, discretionary or automated, will work.

Algorithms applied to Forex trading

Forex is a complex market. As the trader zooms in and out on various time frames, they may see different patterns and directions. Patterns which seem to be forming, may in fact become another pattern or even volatility. These factors and other make it hard for the trader to trade it. Traders may stick to following rules to trade Forex. Market conditions may provide a basis for deciding which rules to use. However the market may not conform to any expectations. The trader may find trading this market tiring and hard to do simply because they are not available to trade at a particular session.

The rules a trader may be following are algorithms, which the trader is themselves executing when they place an order and manage the trade. The complexity of the market may make it difficult for the trader to know when to follow rules and when not to. However this factor is also a potential advantage, as the trader can exercise their discretion as to when to follow the rules. But the reality of Forex trading may be that this advantage becomes less of an advantage as the trader attempts to follow this complex market.

One potential way out that trader may seek it to let computer programs trade for them. These programs follow rules like the trader but coded in a computer program (for example an MT4 Expert Advisor). These programs will trade though the market following the rules and will not tire and can trade at a higher and greater frequency that the trader can. Because they cannot exercise discretion like the human, they may produce losses in the account, sometimes rapidly. But it is a way to try and approach the complexity of this market, with the caveat that trading through it following rules, may produce losses.

The trader can codify the rules they are using for example based on indicator signals. But given the advantages of computer systems in terms of factors such as speed and accuracy, then some strategies may be applicable which are not possible or practical for a human. These strategies are soemtimes referred to as algorithmic trading. But it is all to some extent the same thing, whether a trader is following rules, or a computer program is executing high frequency trades according to a complex statistical model, that is to say algorithmic. But herein can be seen the difference: the advantage of the human trader to exercise discretion and the advantage of the program to tackle markets in a way the human cannot and the similarity, that the human discretion and the model applied may not have the desired outcome. Thus the Forex market may need algorithms, but how and when to apply them is itself a complex matter, reflecting the inherent complexity of this huge market.