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Definition: Automated Forex Trading
Automated Forex Trading, as the name suggests is trading in the Foreign Exchange Market with the help of automated systems/programs. Also called as Program Trading/Algorithmic Trading/Automated Trading/Black Box trading/Mechanical trading/Robot Trading, this method is becoming widely popular because of its flexibility and many advantages.
Automated trading platforms generally monitor the currency charts and other market data to locate entry and exit points for trading. Using the criteria set by the user on basic fundamental (interest rates) and technical data (MACD, ADX, Moving average crossover, Support/Resistance level breakdown), type of trade (Market/Limit/Stop loss etc) and based upon the traders’ reward-risk appetite which is also already given as an input and once programmed with all the inputs, the system gives a Buy/Sell alert when a trend is identified and executes the trade without any human intervention.
Identifying a strategy is an important step in the whole process. Let us say you plan to trade based on some Technical indicators. If a Moving average indicator is used, generally when a short term moving average (say 20-day) crosses over long run moving average (50-day), it can indicate a bull trend. In addition to this, ADX (Average Directional Index) can be used to confirm the trend. So based on this, an order can be placed like this:
Buy at market price if 20 day moving average crosses over 50 day moving average from below and ADX>25
Benefits of Automated Forex Trading:
• As the forex market is becoming more complex due to huge number of variables affecting the movements, automated softwares assist in performing the mechanics of trading leading to lesser effort
• Saves time as trades are placed automatically
• Since the person need not be present to execute a trade, the system works 24x5x365 which means that there are more and more opportunities that can be explored
• Back testing the previous strategies gives a better idea as to what exactly went wrong in case of loss and gives a better idea for trading in future
• Takes away the element of human emotion from the decision making process which removes many psychological biases but also saves time
• Makes the whole trading process more consistent
• Since the system executes the trade immediately when a trend is detected, it is highly useful in making money from short term mispricing by arbitrage