Do Automated Forex Trading Robots Really Work?

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Forex-Trading-RoboTo answer the question that is the title of this article, several elements should be considered to clarify what is really meant by the question. To begin with, a typical forex trading robot does work in that they will automatically initiate and trade forex positions for you based on a set of programmed criteria.

Nevertheless, whether the robot program actually trades profitably in the forex market depends in large part on the price action observed in the market, as well as on the specific parameters and trading rules that are programmed into the FX robot software by its developers.

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What is an Automated Forex Trading Robot?

Before continuing, a definition of what a forex trading robot is would seem appropriate. It probably first makes sense to clarify what an auto trading robot is not. It is not a physical and mechanical robot that sits in front of your computer and trades forex for you.

A FX robot is an automated robot trading system, which consists of a software application programmed with a set of rules and parameters that is designed specifically to initiate and liquidate trades on the forex market using some method of electronic trading automation.

Many automated forex robots take the form of so-called Expert Advisors or EAs that operate within the popular MetaTrader online forex trading platform to execute transactions.  These forex trading systems are known as Expert Advisors because they “advise” the MetaTrader monitoring software — and the trader using it — whenever they are initiating and liquidating positions in their account using the MetaTrader software.

Why Traders Use Forex Trading Robots

FX Robots and Expert Advisors’ main goal is to make the trader operating them money in the forex market automatically and without the intervention of the trader. In other words, the robot or Expert Advisor initiates and liquidates trades without the trader having to sit at the computer or do anything manually.

Forex robots can be effective in finding optimum entry and exit points for trades, calculating ideal position sizes, and executing transactions according to the rules in a pre-determined trading plan.

Depending on the risk level the trader is willing to assume, most forex trading robots can initiate a position according to a set of parameters and signals that are set by the trader based on one or more technical indicators and exchange rate levels achieved in the forex market.

How Do Forex Trading Robots Work?

Most forex robot trader software is based on the technical analysis of currency market exchange rates and generally works in a similar manner, regardless of which type of robot trading system the trader has purchased.

Buy and sell signals are generated by the FX robot depending on market conditions and technical signals based on past and present levels of the exchange rate, along with the particular technical parameters chosen by the trader which are often adjustable.

The result is that the trading robot generates a buy or sell signal when all the relevant market factors and other trading conditions in the trader’s trading plan have been met. 

While virtually all forex robot systems currently on the market have default settings, these settings can be adjusted to meet the risk and capital requirements of each individual trader using the software.

The following screenshot image shows a sample Expert Advisor called MarketTracker running in MetaTrader 4. 

Forex-Robot-MarketTracker

Figure 1: Screenshot image of MarketTrader Expert Advisor running in MetaTrader 4.  The white text between the horizontal red lines in the upper left hand region shows various trading parameters, such as the current stop loss level, the number of currently open orders, the target stop loss, the next lot size to be traded, etc. The red and blue arrows superimposed over the price action show where positions have been initiated, and the white text represents what the outcome was from a trading perspective in pips. The graph in the indicator box at the bottom of the image shows the evolution in the overall balance of the trading account in blue and the equity in the trading account in green over time.

Different Types of FX Trading Bots

While some trading robots are completely self-contained and run as stand-alone computer programs, others — such as the popular “Expert Advisors” that operate within MetaTrader — can work in conjunction with other forex market monitoring and trading software.

To use an MT4 robot, the user must first have a live funded trading account with a forex broker, download the MetaTrader 4 software to their computer and have a working version of the expert advisor software that can be used with the MT4 robot trading system. In many cases, a demo forex trading account can be used, allowing the trader to test the expert advisor software.

Self-contained packages typically offer a trading platform for automated robots which include a proprietary data stream and trading signal generator in most cases. This type of forex system trader is generally offered on a subscription basis, and the trader is charged a monthly fee.

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Evaluating a Trading Robot’s Profitability

Regardless of the type of system used, some Internet research can clarify which are the best forex robots and how successful other people have been using the different types of robot software. Nevertheless, one must be aware that many reviews on forex trading systems are not genuine, and therefore often give an inaccurate account of the product’s profitability.

The optimum way to assess a system’s profitability and whether it will work for the fx trader is using a hands-on approach to see how suitable the software is for the trader’s needs. By downloading the trial software and learning how to perform a backtest in MetaTrader, the trader can arrive at a more accurate and educated evaluation of the potential profitability of any forex trading robot that they are considering purchasing. 

To determine whether a particular trading robot will trade profitably, the system must be tested by back-testing with historical data using the default parameters to see if the system will produce positive results. The trader can also opt for paper trading the system within the market environment using a demo account, which is often provided by most online forex brokers.

In addition, most forex robot packages offer free trial subscriptions, a software demo package or a satisfaction-guaranteed purchase so the software can be tested before committing funds to a live account. The trader can then test the software, inputting their own parameters to determine if the robot will perform profitably with their trading plan.

Advantages of using an Automated Forex Botforex-trading-system-advantages

Automated forex trading systems can be effective tools for determining optimum entry and exit points in the market, calculating the size of positions and executing trading plan transactions.

Depending on the level of risk the trader is willing to take, most forex systems will initiate trades according to an optimum set or pre-determined signals and parameters according to technical indicators and exchange levels in the market.

Some of the notable advantages of using a forex trading robot might include the following:

  • Availability – FX trading systems are extremely easy to purchase and download and can be set up and in use within one hour.
  • Automation – most forex trading robots offer fully automated systems, allowing the trader to concentrate on other activities while the “machine” trades tirelessly around the clock.
  • Elimination of the Human Emotional Factor – human emotions can be extremely detrimental to the trading process for both novices and professionals. Automated trading eliminates this element which carries psychological pitfalls for all traders.
  • Programmability – automated trading systems generally allow for full programmability, allowing the trader to adjust risk levels, profit levels, and other variables. Optimizing the automated forex system’s parameters to initiate and liquidate trades is one of the keys to increasing profitability when using these types of systems.

Virtually all auto traded forex systems are based on a technical analysis approach and usually work in a similar manner, regardless of which software package is chosen to purchase. Buy and sell signals are generated depending on market conditions, with the software interpreting the technical signals based on historical and present levels.

Once certain technical parameters are reached, a buy or sell signal is generated, and the robot software executes the trade. These technical parameters are often adjustable, allowing the trader to set their own levels to generate buy and sell trades. 

Example of a Trade Using an Automated Forex System

As an example, let us suppose that a new high has been reached in the AUD/USD exchange rate. Depending on the configuration of the FX robot’s trading parameters and the nature of the trader’s trading plan, the forex system could have its criteria met to initiate a buy transaction. Once this occurs, the software determines an optimum entry level and position size.

Once the FX robot determines the entry level of the long position, it will typically issue a buy order, which would have the trader go long the AUD/USD exchange rate, either at an optimum price level or at the market as determined by the software’s trading parameters. Generally, the software already has determined the optimal place to take a profit and will enter a sell order at that level after the buy order has been filled.

At the same time, the software will automatically determine the level at which a stop-loss order must be entered to limit the trader’s risk exposure on the trade in the event that the market goes in the opposite direction after the initial position is established. Once either order is executed, the stop-loss or the take profit, the other order is automatically cancelled.

In the above example, the stop-loss order would be entered at the risk tolerance level that is usually determined by the trader. This is an adjustable parameter set by the trader per the level of risk they are willing to take on any given trade.

Robot-trading-profitsHow Effective are Forex Trading Robots?

Despite the pie-in-the-sky claims that forex trading software manufacturers make and the promise of profitable trades, according to the federal government, most of these software packages are a scam.

Most credible business publications, such as the Wall Street Journal or Financial Times, will not even write about them, except perhaps to expose them to the general public as scams.

While trading robots are often advertised with claims and testimonials from many people, many of these claims have been proven to be false, and a great number of investors have lost money using these automatic trading robots. Some people have even lost their entire trading accounts by employing an FX robot.

Even though a trading bot can scan a multitude of charts and information, many times the software will respond to incorrect information or false price spikes that a real trader would probably filter out. While the robot can perform many highly sophisticated tasks, the software is still not capable of creative thinking or exercising truly good judgment. Forex robot trading software is presently limited to initiating trades based on past performance, its current programming and its parameters.

In addition to the limitations previously described, a typical FX trading system does not take into account fundamental or intermarket analysis. And this could cause the trader to lose considerable sums of money in the event of an extraordinary geopolitical or economic event. Nevertheless, a seasoned trader could use an automatic system to gauge technical changes and base some of their trades on the signals generated.

Trading is a human endeavor and markets movements reflect mass human psychology. If making profitable trades was as easy as buying a trading system and letting it trade, then everyone would be sitting at home with their trading bots making a bundle, which is simply not the case. Even professionals that employ complicated algorithms with much more sophisticated computers to trade do not discount the human element and monitor their algorithmic trading programs very carefully.

While these automated trading programs can be somewhat profitable at times, in the long run the only people that consistently make money from automated forex trading software are the developers themselves. Also, many of these programs scalp the market, which means that they take small profits and set a wide stop loss, which can be disastrous for a trading account during a losing streak.

Another consideration is that forex market conditions change constantly and can be manipulated by the activities of central banks and large traders. A software program cannot take into consideration all of the factors that influence the direction of an exchange rate regardless of how many technical indicators it can monitor.

While many people want to make money trading effortlessly, investing in a forex trading robot could cost a trader much more than their original investment. With that said, a trading robot could be useful to a trader in that it could give the trader additional insight into the market. Still, believing that is can be a stand-alone trading unit that you can just set and forget about while it racks up trading profits, is a naïve pipe dream.

Download the short printable PDF version summarizing the key points of this lesson….Click Here to Download

Conclusion – Trading Robots are Probably Not Worth the Risk

In conclusion, becoming a successful currency trader involves more than just installing MetaTrader, opening and funding an account at an online forex broker, and purchasing an Expert Advisor to trade for you.

Instead of risking money by buying a trading robot, a novice trader is usually much better off by investing in getting a deeper education about the forex market. Such things as learning about technical and fundamental analysis, developing their trade plan, and trading in a demo account to test their trade ideas until they manage to find a reasonably profitable strategy they can employ in the markets.

Trading in the spot forex market offers no true shortcuts, which is the reason that you will seldom hear about a forex millionaire using a purely automated system, perhaps with the notable exception of the developers of the software that may become millionaires by selling their systems to the public.

Such robot software developers are generally playing on the greed and laziness of the general public. It should be common sense to think that, if their systems’ were truly superior, then they would not be selling that intellectual property, but rather using it for themselves to extract millions from the market.

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