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Choosing a Forex automated trading strategy

Choosing a Forex automated trading strategy

If you are trying hard to recognize actual advantages of your FX trading, maybe you haven't thought of applying an automated trading strategy. What makes automated Forex trading different lies in the key word – automated, which signifies that this method of trading has no human element in it and is not influenced by human psychology. Forex automated trading is defined as a currency trading technique that uses a PC program which implements a number of analysis tools for defining whether certain currency pairs should be sold or bought at a certain moment in time. The program's user – trader – can improve it by training it to make decisions based on sets of signals received from technical analysis charting instruments. The results of this methodology have proven that automated Forex strategies are worth using, so below we are going to provide more details on how to do it.

Four key items

In this article we would like to tell you how four thoughtfully selected items can assist in choosing the best automated Forex strategy. The checklist includes: description, entry and exit signals, application, and leverage. It is important to note that this list, like any other one, does not give you a 100% guarantee of success or profits with this strategy. The market might be very unpredictable at times, and this fact should not be ignored. This is why we need these four items in place so that an automated Forex strategy is up and running. Relevant performance and leverage expectations should also be included, which will result in higher probability trading with the strategy. Applying an automated FX strategy will also teach you how to lower emotional engagement and increase trading discipline. You will also become more forward looking, which will facilitate planning your trades at your best. However, do not forget that things don't go your way all the time, and losses are inevitable.

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Description

Description is the first thing to look at when considering Forex automated trading strategies. Do your best to discover what this strategy is about and what logic is behind it. It's important to consider the following words: momentum, range, profit target, stop loss, risk, trend, and breakout. Pay as much attention as possible to analysing the descriptions of various strategies. Also, take a closer look at what type of market conditions a strategy is designed to perform in – it often happens that strategies are created for certain market environments, and you will hardly be able to find one to fit them all. Matching a selected strategy with market conditions it works best in is a great way to fulfill your expectations and raise your chances of profitability.

Entry and exit signals

Many traders worry about how entry and exit signals in an automated Forex strategy work. In order to understand that, traders need to grab the general logic behind the strategy; however, it's important not to overestimate each trade conducted by the strategy.

In general, this strategy is an inception for many of your trades in the future. Regard it as a collection of trades that you are interested in, not through every separate trade. You should evaluate the effectiveness of your trading with the same approach: as that of a basket of many trades instead of each trade analysed separately. Here is what you can do when reviewing trades:

  • Divide between your winning and losing trades. Find your average winner and average loser, and look for strategies that have higher average winners, not average losers.
  • The basket should include at least 10 trades in order to be reviewed for trade performance. Analyse your 10 most recent trades and answer the question: were pips added or taken away from your account according to the net results? This is to say that it's recommended to select strategies that easily add pips in a basket of X number of trades.

Application

So, now you know how to use the description for defining market environment in which the Forex automated strategy should perform with the best results. In order to be able to find strategies that conform to certain characteristics, you have to indicate correct market conditions. It often happens that traders fail to do that.

In general, there are two kinds of market environment, each of which may also include several variations. These conditions are usually defined by us as trending and non-trending markets.

In fact, these two conditions exclude each other. When the market is trending, prices are making progress confidently and steadily. With an uptrend comes a whole amount of higher highs or higher lows, while a downtrend brings a number of lower highs and lower lows.

Another type of market is a ranging one – this is when no progress up of down is being made, but the market trades sideway. As long as you cannot direct the market where you need to, focus on understanding which condition brings your automated Forex trading strategy to a reasonable level of profits, and then find a market where this strategy will show itself.

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Leverage

And here is the last item on the list – leverage. Just like the previous one, this area is also often disregarded by automated FX traders. The following scenario is quite common: traders' expectations from good automated trading strategies are too high prior to utilisation, and this makes traders use too much leverage. This is a result of looking solely at the strategy's positives and ignoring its potential downfalls. In order to protect yourself from these downfalls, watch carefully of how much leverage you apply.

We recommend that no more than 10 times effective leverage is utilised. For hyper-cautious beginner traders this figure might be down to five times or even less leverage. The reason for this is as follows: if your FX strategy fails or experiences a drawdown, you will be only risking a small share of your account. Compared to applying more leverage, this method will leave you with much more capital to trade with.

Hopefully, this checklist will prove helpful to you in your journey to profitable higher probability trading. Its efficiency is high - you will begin to notice and apply the best automated Forex trading strategy properly by utilising the relevant leverage as well as performance expectations.

Summary

In general, Forex automated trading is better used by seasoned traders. It requires important traits – to be patient and attentive for as long as possible. It also demands that a trader knows exactly what he wants and expects from such trading; you should be able not get carried away by groundless imagination. If you reach all of this, you will undoubtedly see the benefits from your trading.

Regarding the above discussed items, try to keep them in mind all the time – this might help you a great deal. The strategies' descriptions should be implemented to decide whether they will suit you or not. If you are attentive enough to them, you will be able to comprehend the essence of different automated Forex strategies and what goals can be reached through them. Entry and exit signals relate to conditions that signal to traders about entering and exiting trades; you can also find instructions on how to review strategies above. Concerning application, you have to check whether a strategy will perform well at certain market conditions. And last but not least – the leverage. You should decide on your trading type first, and then allow yourself to apply as much leverage as affordable. Please be careful about possible losses and make sure they will not affect your basic assets significantly.

Hopefully, this article will assist you to earn profits and become a successful trader in the future, as well as to find the best automated Forex strategy for you.


CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.