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Automated Trading

Thu, Jun 15 2006, 11:16 GMT
by Scott Owens

FX Engines

The debate rages on: what’s the best way to capture profits in forex – hard work or automated trading? For someone who wants to trade their own systems, the answer is clear: both. Hard work is the foundation of all profitable automated trading systems.

Content

ANALYSIS

• Why is automation of particular use in forex trading?
• What are the major components of automation?
• What does the ideal automated system look like?

ACTION

• Evaluate the systems that allow you to automate.
• Select, test, and implement the platform of choice.

RELATED MATERIAL

• Test-drive FX Engines for free online at www.fxengines.com to see the power of system building, system testing, and system automation.

About this Report

The Forex Report is a periodic publication that investigates advanced strategies for superior trading performance in the foreign exchange markets. These reports utilize advanced statistical and econometric modeling techniques to create new insight into the trading strategy of the average trader. This Core Concept Brief, Automated Trading, is intended for traders with all levels of forex trading experience and technical analysis understanding.

To learn more about The Forex Report or to register for delivery of all future reports by email, including Case Studies & Data Briefs, please visit www.fxengines.com

Analysis

Do you want to work hard or work smart? That’s the real question. Building automated systems is hard work, but it’s hard work with a payoff. Manual trading may work for stocks and futures, but it won’t cut it in forex for most traders.

Forex is unlike any market in the world. It’s open for trading 6 days a week, 24 hours per day. It’s dominated by multinational corporate treasuries, massive investment funds, and national banking and economic agencies. There are daily price swings that would make most fund manager’s yearly quota. It all adds up to a lot of risk for the average investor, but there are ways to minimize the risk and take advantage of the huge opportunity.

When the average trader first learns of forex trading, it’s all dollar signs and big dreams. The daily volume and profit potential lead many to believe that huge success is just a few pips away. While it’s true that forex presents a large and unique opportunity for traders, it’s also true that most traders are overwhelmed not long after their first few trades. Why?

There are too many chances to make money. Without the discipline to really hold to a system, most traders experience a wide array of events that eventually lead to account liquidation. The temptation to jump back in after a loss or gain, the misuse of leverage, the total absence of money management techniques, and many other ills befall the trader who sees one opportunity after another. Soon, physical fatigue sets in, then mental fatigue, and in the end trading becomes a vicious circle of what-ifs and could-have-been’s.

Emotion is the true culprit – whether it’s the ethereal highs we experience after gains or the remorseful lows we feel after losses. The trader needs to optimize moments of clear-headedness and objectivity to build systems free of the stress of trading. Once the system is built, the trader has to have the discipline to trade it EXACTLY as it was built. For a variety of reasons, that ability seems to be lacking among all but the top 1% of traders. The rest of us need automation.

COMPONENTS OF AUTOMATION
Every automated trading platform should have 4 major components:

• Signals – Signals are the events that trigger market entry and exit. The platform you choose should have sufficient breadth and customizability of signals to meet you system’s trading needs.
  
• Systems – Signals are combined in a script for trade entry, trade management, and trade exit, also known as a trading system or trading engine.
  
• Test Trading – Completely formed engines are tested historically using tic data, and then on a forward-looking basis using a live market price feed.
  
• Live Trading – Tested engines are elevated to live trading status, where a reputable forex dealer executes trades in a real money account.

Caveat Emptor! Many platforms claim to be a complete solution, but close scrutiny can usually reveal one or more flaws. Decide if you can live with those flaws and if not, move on.

THE IDEAL PLATFORM
Automation, in its best implementation:

• Provides exact execution of a trader’s system. The ideal automated trading platform allows a trader to work in a test environment with the exact same set of tools that will be used live. It allows the trader to build systems, test them, and implement them live in such a way that the trader knows that the live system will execute trades exactly as the test system did, and similar performance should result.
  
• Frees the trader from the majority of physical and emotional demands that are particularly forceful in the 24 hour, large player dominated world of forex trading.
  
• Makes money for the trader!

• Automated Trading

Published on  Thu, Jun 15 2006, 11:21 GMT