Forex robots and how they work

In essence, there are two ways Forex traders can approach trading: they can either decide to analyse the market and trade on their own, or they can go with the increasingly popular Forex trading robots that do all the hard work for you and place trades automatically. But, are they really a profitable substitution to trades hand-picked by experienced Forex traders? Let’s find out.To get more news about forex robots trading, you can visit wikifx.com official website.

What is a Forex trading robot?
A Forex trading robot is a simple (or complicated) computer program that analyses the market through various mathematical algorithms, connects with your trading platform and opens, manages, and closes trades automatically. All you have to do is install them to your trading platform as an add-on, and you’re done.
Forex robots continuously follow the market and include each new price tick in their calculation to find a trading opportunity. Once the results of their calculations show that it’s a good time to buy or sell a currency pair, the Forex robot will send a signal to your trading platform to open the trade and keep it open until the price hints that the setup is no longer valid. That’s when the robot will close the position, ideally leaving you with a profit.
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There are virtually thousands of trading robots that can be found online. While some of them are free of charge, there are also many robots that need to be purchased. They usually come in the form of an EA (Expert Advisor), which are then copied in your MetaTrader’s installation folder and the next time you open your platform, you’ll see the robot (EA) listed in your platform’s navigator window.

As previously mentioned, Forex robots usually rely on purely mechanical rules to find a tradeable setup. In the following lines, we’ll dig deeper into the construction of a Forex bot and mention some advantages and drawbacks of trading using robots instead of trading on your own.
Trading robots rely on mechanical rules
One of the main characteristics of Forex trading robots is that they rely on mathematical algorithms to find a trade setup. To do so, many Forex robots incorporate various technical indicators which are then used to decide whether to buy or sell a currency pair.

Popular technical indicators used in the programming of Forex robots include moving averages, oscillators and trend-following indicators. For example, a very simple trading robot may initiate a buy signal if a 100-period moving average crosses a 200-period moving average from the downside. Sound familiar? Yes, this is a popular MA strategy called the MA crossover. What the Forex robot does is simply automate the process of following when a moving average cross happens, across many different currency pairs. For sure, this has many advantages compared to manually looking for an MA cross, but the ultimate trading performance is only as good as the MA crossover strategy can be – whether executed manually or automatically.

Another example of a Forex bot is the usage of the Average Directional Movement Index. A Forex robot can be programmed to open a long position only when the ADX indicator shows that the current trend is up, or to open a short position only when the ADX indicator shows that the current trend is down.

Since the ADX indicator usually lags the price (just like most other technical indicators), the Forex robot may open the trade when the initial price movement is already completed, leaving you either with a small profit or a loss if the price reverses. The following chart shows a simple mechanical trading rule which can be programmed into a Forex robot, using the ADX indicator to open trades.
Mechanical trading rules usually work only during certain trading conditions. A trend-following robot would have a difficult time generating profits in range-bound markets, while a robot that trades support and resistance levels will likely disappoint in strongly trending markets. While more complicated robots take into account the current market environment, their performance is still tamed by existing limitations of mechanical trading rules.

How to evaluate a Forex trading robot
Since Forex trading robots are basically EAs, they can easily be back-tested using the MetaTrader platform. Many Forex bot providers have already done that, so you can pick the one that suits your trading goals. Metrics that one needs to consider are profitability, profit ratio, winning ratio, and maximum drawdown, as these are the most important metrics that are used in the evaluation of any trading strategy.

 

If you’re using the MetaTrader platform, you can check a Forex robot’s performance by clicking on the Signals tab inside the Terminal window and selecting a bot. This will open a window like the one shown in the following picture.You can check the robot’s growth rate, net profit, number of subscribers, as well as the subscriber’s funds, maximum drawdown, trades per week, average holding time, and more. Make sure to make your analysis if you want to employ an automated Forex robot to trade for you, as you want it to make the right trading decisions and return a profit.