Forex Robot For Dummies – 5 Essential Things You Should Know First
Estimated Reading Time: 24 minutes
not only for Large Institutional Traders but also for Small Retail Traders to make solid Profits !!
- 1. Forex Robot for Dummies – Introduction
- 2. What’s Forex Robot / EA (Expert Adviser) Auto Trading
- 3. Forex Robot Pros & Cons
- 4. Can We Really Make Money from Robot Trading?
- 5. How To Choose The Right Robot
- 6. Forex Robot Risk Management
- 7. How To Install an EA
Forex Robot for Dummies – Introduction
Forex Robot for Every Trader
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‘ Forex Own Trading Without Proper Training is A Fool’s Errand, Consider Passive Forex Trading Three Methods You Can Make Profits Reliably!! ‘ Including Forex Robot Autopilot Trading, as the most practical & safest ways to succeed in Forex Trading & some other Financial Tradings. Our priority is Passive Trading especially for newbie traders, but when it comes to Forex Robot, it is surely appropriate for experienced traders as well. Actually, majority of institutional traders are said to use Automated Reprogrammed Instruction such as High-Frequency Trading (HFT) featured in the film Flash Boys. Although retail traders are unlikely to be able to do HFT because it requires heavy investments both in software & hardware in addition to get approvals such as in Financial Instruments Directive (MiFID) II in EU, affordable algorithmic trading has become an essential tool for profitable forex traders. I said PROFITABLE, yes it’s quite difficult for newbie traders to be a profitable – see the hash reality in numbers. Therefore, if you want to make money continuously, using the reliable forex robot seems to be a logical conclusion. However, what we aim at is Not High Frequency Trading but Low To Medium Frequency Trading, means we have to to chose Forex Robot of which algorithm is not relying on speed but the soundness of the utilised trading model. In fact, the profitability of HFT has been decreasing mainly due to the competition among big investment banks & hedge funds (source Financial Times);
What’s Forex Robot / EA (Expert Adviser) Auto Trading
Allow me to repeat that Trading Forex and making money is a hard task, being a good trader requires a lot of study and work by doing homework on the markets every day, watching the markets for an opportunity and carefully entering into a trade. This arduous process is repeated for every trade, day after day. It is a lot of work and is very stressful. So, it takes a lot of practice and analytical thinking to become a successful trader and what if a collection of such analytical thinker made all trading decision? This is the core concept behind Forex robots. A Forex robot is a piece of software that analyses the market based on settings entered by the trader / user. In other words, the user does not need to make any trading decisions but the software will do everything automatically for you. Essentially it is referred to as a robot because it mimics all of your actions, except emotion that’s the biggest enemy for successful trading. Many profitable Forex traders usually buy and sell currencies throughout the day, thus a Forex trading robot can be extremely valuable because the software will manage all your trades in every way from start to finish. For investors whose profit margins can change in the blink of an eye, being able to immediately capitalize on price changes is extremely vital. The program is automated so as to recognize potential for profit, then automatically buy or sell. Their algorithms look at a wide variety of daily, semi-daily, and long term trends, of which settings are often customizable, giving the trader the ability to fine tune its behavior based on preferences. A forex robot makes a trade based on what is most likely to achieve a profitable end result. When it loses a little it doesn’t panic and end up flushing away even more cash; when it wins big it doesn’t waste the winnings on the emotion of excitement, thinking that it can win again and again today only to end up losing it all. With that said, properly programmed, a robot can manage all aspects of one’s trading operations to make profitable trades more times than not. Forex robots will interact directly with your Forex platform, and the industry-leading forex trading platform is Meta Trader (MT). Because of its versatility and simplicity of use, most of forex brokers across the world offer MT-4 or MT-5 as a trading platform for its customers. An robot is written in Meta Quotes Language 4 (MQL 4) / 5 (MQL 5) , the built-in programming language of MT-4 / MT-5. Therefore, the most common type of forex robot is designed for the Metatrader, and is often referred to as a ‘forex Expert Adviser’, ‘forex EA’, or just ‘EA’, or simply Bots. Metatrader expert advisers can take control of your trading account and make trades according to whatever parameters you set.
Two Key Reasons Behind Forex Robot Popularity
Forex robots have become popular with traders for two main reasons.
Firstly, it eliminates the major weakness which holds traders back from becoming successful, i.e., human emotions. As any seasoned trader will tell you, the frail human emotions of fear and greed are a trader’s arch enemy and the cause of most traders’ failure. People tend to ‘feel’ when they are speculating upcoming changes rather than study charts, look at trends, and base their trades on solid numbers. People also tend to react to large loses, and even gains, by making forex trades that they would normally never even consider. This is where forex robots step in to provide solution, simply removing the psychological element of trading, which can be detrimental.
The other big reason for the popularity of robots is that the idea of making money by doing nothing, so called Passive Trading. A Forex robot allows currency traders to make trades even if they have no prior investment experience. Forex robots also allow traders to participate in the currency market with very little time commitment. This Passive money making is simply irresistible.
Forex Robot Pros & Cons
The below shows a summary of pros & cons of Forex Robot in comparison with human / manual trading;
Forex Robot Pros
100% Passive– Robots allow newbies to start Forex trading without any in-depth knowledge of Forex. You do not need to start out being an expert trader. All you have to do is selecting the right robot for you.
Robots don’t get tired and can trade for you 24 hrs / day capturing all markets opportunities in the entire globe – Human traders is often forced to trade during certain times of his waking day due to a lot of restraints on their time, eat, sleep, and other responsibilities such as work, family, and friends, but in doing so he is missing out on both entry and exit opportunities offered by other time sessions. The robot can work the entire 24 hour currency shift searching for trading opportunities.
Assessment (Back-Testing) Ability – Proven Performance Backtest applies trading rules to historical market data to determine the viability of the idea. Means you yourself can assess the robot’s past performance to avoid being fooled by the seller’s pitch. When designing a system for automated trading, all rules need to be absolute, with no room for interpretation. Traders can take these precise sets of rules and test them on historical data before risking money in live trading. Careful backtesting allows traders to evaluate and fine-tune a trading idea, and to determine the system’s expectancy – the average amount that a trader can expect to win (or lose) per unit of risk.
Robots are able to carry out your strategy without compromising your judgment or deviating from your pre-determined trade goals due to emotional conflicts – The biggest obstacle to successful trading is emotional elements such as greed, fear, ego or bias. Fear becomes an irrational force when it prevents the trader from taking necessary trades or hesitating too long, particularly after having suffered a losing trade, or it prevents a trader from closing out a bad trade with a loss. Greed, its emotional opposite, can cause traders to make random trades, or hold on to positions longer than their trading system dictates. Humans are also plagued with ego and bias, seeing what they want to see from the chart and indicators, looking for confirmation for their hunches, and unable to see things critically and objectively. As long as there is real money at stake it is very difficult for a human to overcome these negative emotions and biases. Robots help combat emotions by getting you in and out of the market based on historically tested strategies.
Robots can perform trades correctly – If programmed properly, a robot will not buy when it must be selling. There’s also a very slim chance to invest in a wrong lot size and it will not misplace the orders of t/p (take profit) or t/s (trailing stop) or s/l (stop loss) etc. This is a great advantage in trading, because monumental errors in forex can be converted into your substantial loss.
Robots can to identify and react to opportunities as the speed human can’t, thus scalping technique can be employed – You do not need to worry about missing a trading opportunity because you are not staring at the right chart closely enough, or wasting precious seconds entering an order manually while the market moves away from you. The EA uses the speed of the computer to monitor the markets, seek and identify trading opportunities based on coded rules, and execute based on these rules in fractions of seconds. However, don’t mistake this for the HFT explained at the beginning which executes trades within milliseconds.
Robots have consistently & discipline in executing your trading plan – Smart traders are aware of having a trading plan and sticking to it with utmost discipline. Most human traders have no trading plan or fail to stick to them. The robot is designed to stick to the plan without exceptions. It is the way to become a 100% disciplined trader overnight even if you are the most undisciplined person in your private or professional life.
Economical Entry Cost – Robot industry is extremely competitive and this has driven the price down over time. Considering the performance of some of the better robots, the money you pay upfront can soon be recouped if you trade it on a reasonably sized account.
Forex Robot Cons
Less capacity to think – Bear it in mind that in autopilot forex trading, the robot can only make decisions based on the settings that has been programmed into the platform. For example, it may invest in Japanese Yen even in the midst of a strong typhoon that may affect the forex trade. Meanwhile, a human trader can easily make a decision because he has the capacity to react in this particular scenario.
Not designed for fundamental – It is very difficult to get an EA to read and decipher fundamental data, such as economic and political events. Hopefully the result of the event is impeded in the price action, and then the EA can read it. But a sudden extreme event that quickly reverses the market direction can cause an EA to get stopped out, and/or enter too late in the new direction.
Can’t cope with unpredicted market move – Most EAs are mathematically and technically based, and work best on trending markets, so they are vulnerable when the markets become sideways. When the markets enter into low pip range, sideways activity, EAs tends to get chopped up.
Limited Currency Pair – Most EAs are coded for one pair only, although some work on multi-pairs. Reason is, different formulas and conditions work differently across different pairs, despite the >80% daily correlation between many of them.
Can We Really Make Money from Robot Trading?
80% of Professional Trading Uses Robot
Firstly, allow me to repeat what I said at the beginning by quoting World Finance article as follows;
Throughout most of the 20th century, robot traders would have been a mere figment of the (sci-fi film-influenced) imagination. But now they’re used by over 80 percent of trade markets, including the majority of investment banks and other big institutions, with retail trading remaining one of the only sectors still reliant on human brains. In short, the conventional trader depicted in clichéd Hollywood movies has almost completely died out, and with it the elements of risk-taking and intuition that defined the industry for hundreds of years.
No Holy Grail But Stay Positive & Be Prepared
It’s obvious that top financial firms that generates steady profit heavily rely on robot trading, means it works. However you should understand the reality of: No Holy Grail It is important to note that there is no such thing as the holy grail of trading systems, whether automated or not. Most of the companies and individuals that sell these robots, are great about writing sensational claims, but the customers soon find out that the forex robot is not as good as claimed – Never ever be dazzled by popular sales pitches. Therefore, the most important element is choosing the reliable robot. If you are able to catch a Forex Robot that works during the time that you are trading it, you can make a lot of money. However since Forex trading is risky and market condition can be suddenly changed, you can also lose all of your money if trading a bad robot. For this reason you need to: Stay Positive and Be Prepared Just because you buy one bad EA it does not mean that you should give up on Forex Robot Trading. However you need to have risk management (see the details later) in place to make sure that a bad EA will not wipe out your account. Before you begin trading you need to decide what you are hoping to get out of your Forex robot and how much you are willing to risk. Once you have these numbers in place you need to look for robots accordingly and analyze various statistical factors such as maximum draw-down, profit factor, expectancy and efficiency. In theory, the risk & reward is a positive correlation means the robot that makes higher profit also takes higher risk at the same time. So a person that wants to make 20-30% per year may not be necessarily looking for the same robot that a person that wants to make 1000% per year. Therefore finding the right robot is greatly dependent on what you are looking for and your risk appetite. It is essential to test your robot in a demo and live account to make sure that it works with you.
How To Choose The Right Robot
Know The Type Of Robot Strategies That Fit You
Analyzing the numbers is critically important when choosing the robot but many traders leave out some of the emotional things to analyze. For instance, does the overall strategy of a particular robot fit your personality, which is partly related with the above profit target 20-30% or 1,000% per year? There’s nothing worse than getting a robot that just doesn’t fit your personal style, so let’s briefly talk about it. I found the table prepared by bestforexrobot.com is a good summary, thus I’ll copy it as follows;
It’s a good idea that take some time to sit down and write out what you hope for in a robot. Be honest & as realistic as possible, which can define you which type of trader you fall into, in the above table, Autonomous, Aggressive, Anxious, Minimalistic & Complex. Then you will know what you should avoid and choose. For example, if you’re a risk taker and are only putting a small amount of money into the account, you’re hoping to see fast results in a big way. Buying a slow and steady robot in this case obviously would not be ideal! It’s very important to spend some time thinking this over and making sure that the robot you purchase or build will fit you.
Another very important factor to keep in mind is which currency pairs does the robot trade? All currency pairs are not created equal, that’s for sure. The GBP/JPY and AUD/NZD are historically very volatile pairs, while several of the majors spike up and down much less. If you’re more of a risk taker you might look for a robot that trades these wilder pairs. But if you’re a more conservative trader you may look for a robot that trades the EUR/CHF for example (this is considered the least volatile pair). Many Forex traders overlook these emotional factor, so don’t underestimate, it affects your profits significantly.
Forex Robot Risk Management
Fancy Sales Pitch
First of all, remember that preservation of capital is the number one most important rule of currency trading success. If you lose all your funds then you will effectively have nothing left to work with. You don’t want to be forced to refund your account after a bad stretch. Preserve your capital so that you can live to trade another day. For money management, go to PAMM Investment Ultimate Guide – 7 Secrets To Find The Best Account, all of which principle applies to the robot as well. There a few specific points you may want to follow for better risk management. Firstly, let me repeat Never ever be dazzled by fancy sales pitches mentioned in the above three chapters. You may often encounter the following two popular claims in the market;
- 1) Huge Quick Return;
many robots claim incredible return like double your account in a few weeks etc. Yes it is not necessary lie but you need to interpret it as you’re just as likely to completely and utterly wipe out your trading account as you are to double it. High risk follows high rewards, and any Forex robot trader that trades with a big enough leverage and position size to grow your capital that quickly has the capacity to lose it all even faster.
- 2)90% or More Win Rate:
this is what you may often find in the promise of automatic trading. Again it’s not necessary a lie but the problem with that is, to have that high a win rate, robot traders will often cut profits short with small profit targets, and let their losses run far and wide with huge stop loss distances. If you do the math, you’ll quickly realize that even hundreds of small wins can be wiped out with just one bad loss.
Specific Risk-Management Actions
Having said, you need to take the following basic risk-management actions;
Start up Free EA with Broker Free Demo Account – If you’re new to Forex Robots you should use free demo account first. Aside from the fact that they’re free, the biggest advantage is that you know and understand how they work. The idea of trusting a pure black box with thousands of dollars in capital never sat well with me. You need to do both back & forward testing – in fact you don’t need to do all the testings by yourselves but get the info from other experts. However, trying to do at least 1 EA must give a good experience of knowing why an EA places trades and how it works. One thing to also keep in mind when looking at past performance is that although statistics are a good indication about your MetaTrader robot they are not always indicative of its future performance. Markets always change, so it’s important to monitor your robot. Just because it did well in the past does not mean that it will do well in the future.
Money Back Guarantee Offer – It’s become industry’s common practice that enables you to get a refund inside a certain trial period (usually up to 3 months). However many purchasers are laziness enough or overlook this positive fine print and fail to do so. The vendor of the rubbish robot knows that a certain percentage of customers will not redeem their money, so be bold to claim if you’re not satisfied, they are obliged to accept your request as long as they are not scam.
Manual intervention of the EA is not advisable – Usually the creator of the EA has a better understanding of its inner workings and has hopefully done all the appropriate back testing and optimizations. Traders who want to fiddle with existing trades according to their own whims or rules invariably end up degrading the EA’s full potential.
Set Multiple Robots Accounts with Different Strategies – Make sure that your first robot is a rather conservative one and avoid high reward / risk setting robot that may wipe out your entire balance. A strategy that you could adopt is that once you have seen the system working successfully for you then open up a second account with the new robot with more aggressive risk settings. Let me repeat, keep your primary account allocated for conservative growth and allow your secondary account to act as ‘play money’ where you know that you are risking a lot to try and win a lot.
How To Install an EA
I will briefly show you the basic process of installing an EA in your computer as follows;
- Download an EA and note the location of where you saved it
- Select & copy the EA file you want to install
- Locate your MetaTrader4 folder (usually in the C: drive)
- Paste the files into the Experts folder. A pop-up requesting admin permission may appear; if so, just click Continue.
Installation of the EA on MT4 Trading Platform
- Firstly, launch your MT4 platform
- Locate the EA section under the Navigator pane at the left side of the platform. Click on the Plus sign and the available EAs will be listed
- Select the EA you intend to install and drag it onto one of the charts on your platform
- A pop-up box will appear showing the settings of your EA
- Check & Adjust the settings based on your trading strategies & risk management
Allow me to reiterate that never ever start EA with your real money. Make sure you test it out on demo first and see how it works until you get confidence and feel comfortable.
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