How to Choose a Forex Automated Trading Strategy
Are you struggling to see real benefits in your Forex trading? You may not have considered the application of automated trading strategies. What makes automated Forex trading different? The answer lies in the crucial word - automated, which means that it is free from human influence and it is not affected by decisions based on human psychology.
As a matter of fact, Forex automated trading is a method of trading diverse foreign currencies with a computer program, which is based on a variety of analyses that help to define whether a trader should sell or buy a currency pair. The trader can advance this program by teaching it to make decisions based on a set of signals derived from technical analysis charting tools. The outcome of applying this method is enough to give grounds to utilising automated Forex trading strategies - and we are going to discuss this in more detail in this article.
Automated Trading Strategies - Four Key Items
We are going to provide you with an example of how four carefully chosen items can be decisive when attempting to choose successful automated trading strategies. Our checklist consists of the following:
However, we must stress that this list does not guarantee 100% success, nor does it guarantee a profitable strategy. We all know about the unpredictable nature of the markets and it would be unwise to ignore this.
The major goal of these four indispensable items is to identify and put into practice an automated Forex strategy, with the help of utilising appropriate performance and leverage expectations that should result in higher probability trading. Besides this, you will also learn how to minimise emotional involvement and stay disciplined in your trading. Furthermore, you will be more far-sighted, so you can plan your trades as effectively as possible. You must remember that things will not always go your way whilst trading and that making losses is highly probable.
The first thing you should look at when approaching Forex automated trading strategies is their description. Your task is to find out what the strategy stands for and to consider the main logic behind the strategy. It is useful to take into account the following words: profit target, risk and stop-loss, momentum, range, trend and breakout. You should be careful and attentive while reading the description of different strategies.
Also, never underestimate the importance of the type of market conditions that are intended to be used with each strategy. Often, strategies are created to work well only in certain environments, and it can be very complicated to find strategies that will work well in all market environments. In order to fulfil your expectations, you should recognise the type of environment where each strategy works best, and then apply the strategy to a market exhibiting these conditions.
Entry and Exit Signals
A large amount of traders spend a lot of their time worrying about the entry and exit signals within an automated Forex strategy. It is important to understand the general logic that the strategy implies, although we must not overestimate each trade the strategy makes.
Overall, this strategy is an inception for hundreds or even thousands of trades to come. It is more of a collection of trades that we are interested in, rather than every individual trade. Try to perceive the performance of your trading as a basket of many trades, rather than being based on any one trade. We have detailed some actions you can use while reviewing trades:
- You should place all of your winning and losing trades in separate baskets. Work out what the average winner or average loser is, and seek out strategies with higher average winners, rather than average losers.
- You should review the trade performance in baskets of at least 10 trades. Review your last 10 trades and answer the following question - did the net result add pips to your account or take them away? The conclusion is that you should seek strategies that add pips in a basket of X amount of trades without any problem.
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We have previously mentioned the description and how to use it in order to define the market conditions where the Forex automated trading strategy is designed to work. As long as you indicate the correct market conditions, you can search for strategies that conform well to this characteristic. Unfortunately, traders often miss this step. Generally speaking, there are two different kinds of market conditions that may have several variations. We're going to define these conditions as trending and non-trending markets.
These two conditions are mutually exclusive. In the time when the market is in its trend, prices are steadily and in a confident way, making progress. You will see an uptrend and a whole amount of higher highs or higher lows, along with a downtrend series of lower highs and lower lows.
On the other hand, ranges form when the market is not progressing up or down - and instead, trade sideways. All that you need to be concerned about is which kind of condition brings your automated Forex trading strategy to a good level of prosperity, and then locate the market where this chosen strategy will work best.
This is another area commonly missed by automated FX traders. A lot of the time, traders expect too much from good automated trading strategies before utilising them, which can cause traders to apply too much leverage. This generally occurs due to the fact that traders tend to only look at the positives of a strategy, and ignore the potential losses. If you want to ensure that you are safe from such downfalls, you should be careful with how much leverage you apply.
We suggest utilising no more than 10 times effective leverage. If you are being especially careful, particularly if you are starting out, you may consider using less leverage at five times the amount or even smaller. The reason? The benefit of exploiting smaller amounts of leverage is that if your Forex strategy experiences a drawdown, you are just risking a small portion of your account, and consequently, you would have much more capital left to trade with, compared to using larger amounts of leverage.
We hope that this checklist will help you on your road to success in higher probability trading. Hopefully, you are on your way to start implementing the best automated Forex trading strategy properly by utilising the appropriate leverage, as well as performance expectations.
Forex automated trading is more suited to advanced traders. The crucial skill needed is to wait and be attentive as long as possible. To some extent, the important task for you is to know what exactly you want, what you expect, and not to mislead yourself with entirely groundless imagination. It will be a huge advantage to your trading, and you will undoubtedly see the benefits.
Concerning the items we have discussed, always keeping them in mind can really prove useful. The description of strategies exists to define whether they are going to be suitable for you or not. By paying attention to it, you will most likely understand what different automated Forex strategies are about, and what goals they aim to reach.
Entry and exit signals indicate the conditions that are appropriate for traders to enter or exit a trade - and the ways of reviewing strategies. As for application, you get to find out whether strategies interact well with certain market environments. Determine what type of trader you are and then apply as much leverage as you see fit. Just be careful and make sure that any losses you could potentially suffer will not affect your basic assets.
We hope that the information here will help you in gaining profit and achieving success in the future, as well as finding the best automated trading strategy for you. If you are interested in learning more about how to automate trading strategies, you can check out the Automated Trading education section of our website.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.