Manual trading vs Automated Trading
In the age of artificial intelligence and supercomputers, does it make sense to switch to automated trading systems such as forex robots or expert advisors?
In our next series of articles, we move away from trading psychology to discuss automated trading. BUT it just so happens that the reason many forex traders make the switch from manual to automated trading is for the psychological ‘benefits’.
Forex robots or other automated trading systems can theoretically make your life much easier by placing the trades automatically for you. This allows you to focus on other aspects of your trading- and perhaps gives you more time to enjoy life!
Be warned: automated trading is no silver bullet for trading success and has its own hurdles to overcome, just like a manual (otherwise known as discretionary trading).
However… a major benefit to consider is that automated trading removes emotions from trading decisions. It can also save you time and possibly a lot of the effort required when trading manually.
If your trading strategy says “buy the breakout” then you’re Expert Advisor on MT4 won’t care if your team lost the match on Saturday, it will always buy the breakout!
Contents: manual trading vs automated trading
- Manual trading
- Automated trading
- What is a forex robot?
- What are Expert Advisors?
- Example of an EA
- Pros and Cons of automated trading
- How to install an EA robot on MT4
Manual trading
Manual trading is what we’ve come to imagine day trading as. A single human trader uses an online trading platform to buy and sell with the click of a mouse. All the decision-making as well as the execution of the trades are made by the trader.
Every trader does it slightly differently but the process always involves the study of financial markets using some form of analysis. Technical analysis tends to be the choice for most forex traders. The trader bears responsibility for all the results, profits, and losses, which are entirely a function of their efforts.
As we have discussed extensively in articles on controlling your emotions and getting a trader’s mindset – to reach success, a trader must manage both their trades and themselves. When trading, the trader must stay alert to the risks and opportunities.
Automated trading
Automated trading assigns some or all of the trading duties to a computer algorithm. The trader will use an automated trading program that has already been created or create his own by programming actions into the computer code to respond to pre-set conditions.
Some automated trading systems will scan news headlines or respond to economic data but most work based on price action.
No understanding of the markets is required to run the automated trading program because the algorithm carries out all the analysis. It is advisable to understand the trading statistics like win rate or largest drawdown to understand the historical performance of the automated trading strategy.
What is a forex robot?
Forex robots are computer programs or trading systems that trade on the Forex market automatically. Once you have a trading robot setup, all you as a trader need to do is turn it on, and the robot does the rest.
They have been created by experienced traders to execute trading strategies with no or minimal interaction from human traders.
The robots execute trades automatically based on mathematical parameters you or an expert trader set and adjust to suit your needs. The best forex robots will include parameters for when to buy, when to sell, and risk management.
Normally these automated systems will be based on human expertise such as algorithmic trading or technical analysis but a growing number are based on machine learning or artificial intelligence programming techniques.
Forex robots are primarily used for speculative purposes, but sometimes to hedge one’s portfolio against currency risk.
What are Expert Advisors?
Expert advisors, often shortened to EAs are nothing but automated trading strategies that are programmed in the MT4 platform.
NOTE: MT4 is short for Metatrader 4 – the platform offered by Key To Markets. The software code used by Metatrader 4 is called Metaquotes Language, known as MQL4. The MT4 platform is available on Windows, Mac, iOS and Android computer operating systems.
Example MQL code
Source: babypips.com
The expert advisor is an autonomous software running on your computer. It will analyse various data sources that you make available to it and make decisions about buying or selling automatically based on its programmed rules.
Expert advisors perform trades based on predefined trading strategies. Generally, they are designed to trade the market without human interaction but can also be used to automate certain parts of the trading strategy such as entries or exits, but allow the trader discretion on other matters, like the decision to trade a specific forex pair.
Example of an EA
There are probably as many expert advisors for automated trading systems as there are discretionary trading systems. Most expert advisors fall into similar styles of trading strategy used in manual trading, some of which are riskier and/or more lucrative than others.
Typical categories include
- HFT (High-frequency trading) or scalping
- Momentum or trend trading strategies
- Counter Trend or reversion to the mean strategies
Here is an example of a simple trend trading strategy that could be coded into an automated strategy:
IF the market price is above 20 days moving average AND above the 20-day high
Enter buy-stop order 5 pips above market price
Set stop loss 20 pips below the entry price
Close trade when the price is below the 20-day moving average
These simple instructions for entering orders can then be written in MQL, Python or some other programming language.
Automated trading for trading psychology
Throughout our series on trading psychology, we emphasised the importance of getting your mindset right so that you can ‘Plan the trade, and trade the plan’. Planning and trade execution need a razor-like focus, almost as if you were a… robot.
Forex robots are computerized trading tools that can be used by traders to automate their forex trading process. In theory, the more that this process is automated, the less the process is prone to human failure caused by emotions and psychology.
The main purpose of forex robots is to generate profit for the trader by carrying out trades automatically. In order to complete the main purpose, the robot must account for volatility and the associated risk and keep the capital in the trading account safe.
Automate the decision-making…
The secondary purpose is to keep you sane! Automated trading can remove a lot of the stress from day trading- and thus help you make better trading decisions.
If you don’t believe us, would you believe Ray Dalio?
Dalio runs the biggest hedge fund in the world and was an early adopter of computerised trading systems.
“Whether you like it or not, radical transparency and algorithmic decision-making is coming at you fast, and it’s going to change your life.” – Ray Dalio
We know from simple everyday examples that algorithms and computers can replace our own decisions. When was the last time you looked at a physical map before taking a car journey? Google Maps is our new automated decision-maker for how to get places!
Pros and cons of automated trading
Traders searching for the silver bullet to their forex trading will not find one in automated trading.
| Pros | Cons | |
| Manual Trading | Control – the trader has full control over the trades.
Flexibility – can respond to changing market conditions. Rewarding – arguably some of the joy is removed from trading during automation. |
Human error – people make mistakes.
Study – a trader must become an expert in financial markets to succeed. Time & patience – it takes years to become really consistent. |
| Automated Trading | Removes emotions – saves time not analysing markets.
Consistent – as long as the program is on, the trades will be taken – even if the trader is asleep! Non-professionals – even those who don’t know how to trade can start trading. |
Mechanical failure – the system could error and place the wrong trades.
Inflexible – No discretion is possible if market conditions change. Programming – Need to pay for a ready-made system or learn to code. |
How to install an EA robot on MT4
1. Add EA files
- Save your EA files to your to your computer
- Launch MT4 and choose File -> ‘Open Data Folder
- In the File folder that was opened, select the MQL4 folder
- Copy the EA files into the sub-folder ‘Experts.
- A window requesting admin permission may appear; just click ‘Continue’.
2. Install the EA to MT4
- Launch the MT4 platform and locate the ‘Navigator’ tab
- Click ‘Expert Advisors’ to see a drop-down of all available EAs.
- Drag the EA you wish to use onto an open chart window.
3. Tweak EA settings
- In the pop-up window that appears, select the ‘Common’ tab
- If you plan to use the EA for live trading, check the box ‘Allow live trading’
- Under safety, select ‘Allow DLL imports
- Select the ‘Inputs’ tab and check the parameters are correct
- Click OK to start
Picking a forex robot
If we’ve wet your appetite with this beginner’s guide to automated trading and you’re interested in finding some strategies to test, make sure to read our guide on How to pick a forex robot.
