Automated Trading Software....Does it really work?

If you are new to forex or stock trading (or day trading) and think that the best route to go in making trades is to use automated trading software, you should probably read this first. First, a little about me. I have been trading online as a hobby now for roughly 5-6 years and have run the gamut in regards to trading software, books and everything else. I have educated myself on theories and have trade all forms of automated software. I have used the following methods to try to give myself that "edge" in forex trading...

• Automated software in which a forex robot does my trades for me.
• A mixture of forex indicators (all of them believe it or not) to try to "predict" the market.
• Scalp trading in which I am gleaning small amounts of pips at a time over the span of the day.
• Day trading in which I stick to my computer all day long looking for the best possible entry points in my trades.
• Purchased trade calls from online traders
  

As you can see, I have pretty much run the gamut on forex trading. And if you have been trading, whether it is commodities, stock or forex, then chances are that you have run the gamut as well. And if you were to do the math (95% of most traders will exit the market broke within the first couple months), then chances are great that you haven't found something that actually works.

Automated Forex Systems- Does it actually work?

Now, if you are like me, you probably have seen these products that claim to automate your trading for you. Basically, what happens is that these automated forex systems do (supposedly) is make life simpler on you by having all the indicators in place and when a "good" trade becomes imminent, it will go ahead and execute the trade for you. Sounds kind of like a advanced version of buying entry points, right? Well, in a lot of ways, it is.

Getting into the "guts" of these automated forex systems

Imagine that you have found the holy grail of forex trading where you are consistently making profits using a system. Most of these systems are no different than what you would do if you started testing your own personal forex system by blending a series of forex indicators available on your trading platform and fine tuning this until you have finally reached a point where your drawdown is low and your risk to reward ratio is high.

Basically, this is all that these automated forex systems do. They basically are a series of indicators blended together that look for whatever they have been coded to look for. The end result is that when an optimum trade comes (at least in the eyes of the robot), then it will initialize a trade for you. Usually, these systems also have an exit point in which they will close the trade once it hits the exit point.

So as you can see, a "bot" will do not much more than a professional trader would do. It examines the market and initializes trades just as a professional forex trader would if they were making the trades themselves.

Of course, this is the reader's digest version of how it works. And the pro's of using an automated forex system are that you can basically go about your life while it does your trades for you. Now, let's examine the negatives of most of these systems.

You should always be aware of the Drawdown

If you are new to trading, then the term "drawdown" is probably new to you. Basically a drawdown is the most you can lose in a particular trade. Drawdowns are just a part of life for trading. Since most markets are largely unpredictable and the forex markets are the most volatile, you can pretty much bet that all systems, no matter how perfect they are, will have some losses. This includes even the best forex traders (or stock traders) All automated forex systems should be able to give you a basic overview of how they tested, what they tested and what they experienced in their testing. If they don't give you a drawdown percentage, then you should walk away from the system and look for another. In regards to the drawdown, the creators of the system should also give you information as to how long it was tested and ideally should have records to show you their trades to back their claims up. Remember, anyone can claim to have the perfect system. The proof should be in the pudding and available to you. If they can't provide the information, then chances are great that it is scam.

Stop/Loss Points?

One of the biggest disadvantages to using automated trading systems is that most won't incorporate a stop/loss structure to control the bleeding when the trade doesn't go your way. In the forex market, this can be the difference between saving your butt or suffering a margin call. Like I said earlier, it doesn't matter how good the system is, you will take on losses. And given the volatility of the forex market, this could mean BIG problems if there isn't a stop/loss in place.

Another problem that many systems don't take advantage of that pro forex traders actively use is the moveable stop loss point. For example, let's say you have made an entry into a trade and positioned your stop loss 20 pips below your entry point. Now, let's say that your hunch was right and the trade skyrockets 40 pips in a period of an hour. Now, if you were like most pro forex traders, chances are you would reposition your stop loss up so that even if it did resolve back down, you would profit. Many automated systems simply don't employ the moveable stop loss in their forex trades and as a result, might actually cause a loss (rather than profit) if the market never reaches the exit point and corrects itself back down.

I have used automated forex software and am currently testing a new piece of software that deals with scalping PIPs on a 1 minute chart. However, understand that if you are going to use this stuff, it is best to have a good foundation of forex trading, PERIOD. Things like being able to chart and identify support and resistance lines and fib retracements are absolutely essential to understanding how the market works. If you can get a firm grasp of these, then you can mix your automated trades up with your regular trades. I have discovered personally, that many of the profitable trades that I realized didn't come from a forex bot per say, but from my own charting knowledge that I did with a pencil and a sheet of paper. If you don't understand these things, then you are going to want to learn them overtime. Don't rely solely on someone else's forex system.

What a Forex Bot cannot do for you

I have gone over the limitations of using an automated forex system. But what about what you should expect when using a bot? First of all, don't expect to get rich with forex. There are all sorts of myths about people trading and making 50% roi in just a month. While this can happen, understand that these same people are using an extremely aggressive approach to trading and will probably bankrupt themselves if they continue to trade this way. Simply put, you can not sustain these numbers on a consistent basis and once you start to accrue losses in your forex account, you can pretty much hang it up. When you start to account for those points that the forex brokerage firms take for every losing trade, then you will find yourself on the slippery slope of bankruptcy.

Also, realize that there are systems that will work for some time only to peter out because the indicators that were used need to be recalculated according to the environment of the current forex market. I actually see this more than anything else when it comes to systems. A system will work for awhile only to start to lose steam and go in the other direction when the climate of the market changes. What happens then, especially if you don't know what you are doing, is you start to give back all your profits until you aren't making any money. As you can imagine, the psychology that is behind this when you are taking losses is extremely powerful which yields to even more mistakes.

Finally, if you are going to use a forex system, I suggested that you test it for no less than a couple months before using it with an active trading account. The reason for this is because testing for a week or a couple weeks is no litmus for how well it will do over time. Although the creators of these automated trading systems might give you a drawdown to work with, you really need to see for yourself, as these numbers could be exaggerated.

Should you go with an Automated Trading System?

Now for the million dollar question....should you go for an automated trading system? Well, it depends. The obvious benefits of using an automated trading system is that you won't have to babysit your forex trades and can go about doing other things. OR if you are completely new to trading online, then you could get away with making a little profit on the side while you are actually learning the platform and how trades work (although, you could also lose quickly as well since you have no idea what is going on should the system not work). The biggest thing to think about is that if you are going to use an automated trading system then you should make sure that you have tested it thoroughly before you risk your money.