FOREX Trading Bots Explained
In the search for trading success, investors will try to uncover any edge they can. Enter the FOREX trading bot, which is a software program designed to align to foreign exchange market price movements and send signals to traders to buy or sell a currency pair at a certain time.
FOREX bots can be set up to run automatically and are generally easy to integrate with most online FOREX brokers or exchange platforms. For FOREX traders looking for success, receiving a signal to buy or sell at a certain time is a very powerful thing, hence the rise of bots. Traders will find that many of these bots are customizable with MetaTrader, rightly understood to be the dominant FOREX trading platform on the market. It helps traders place orders and manage trades in a way that removes the emotional side of investing, which many traders are prone to do.
FOREX trading robots can be bought over the Internet, although traders should exercise caution when buying a trading system. In this article, we will discuss bots in more detail, covering many of the common questions on the subject.
What is Bot Trading?
So, how does it all work? Using the enormous computational power available in today’s world, software developers have computer programs, or bots, that can identify patterns and be programmed to automatically carry out trades on your behalf. By cleverly using a combination of indicators and tools, they can predict the changes in the prices of different currencies in a way that makes trading much more simple, consistent, and profitable.
By deploying the MQL scripting language, bots work on MetaTrader, enabling traders to give trading signals or position orders and manage their trades. Most elite and professional FOREX traders use bots to trade as a matter of course. Here are some of the most important parts of bots:
- Traders from all ends of the experience spectrum can use them.
- They can analyze vast amounts of data to get an efficient signal.
- They take away the urge to act emotionally.
- They scan for tradable currency pairs and offer them to traders.
- They do not tire and can trade while you sleep.
- They are customizable to different strategies.
However, bots are not the be-all and end-all. There are disadvantages to them, which we will discuss further along. What you should know is that as advanced as bots are, there are no foolproof trading systems that will make you money all the time. If that were true, the FOREX industry would be a one-way street because traders would win all the time. Bots have their limitations, too.
What Are the Pros and Cons of FOREX Bots?
It is important to know from the outset that FOREX bots can bring a lot of value, but there are also major pitfalls to which you need to pay attention. Given the success of bots, many opportunistic companies have entered the market promising you will get rich quickly with bots. It is common for companies to appear on the market selling bots and then disappear all too soon. Here are some of the pros of cons of bot trading:
Pros
Timesaving
Time is a valuable commodity in every walk of life. By automating all the processes involved in FOREX trading, from analyzing charts to executing trades, FOREX bots free up your time so that you can focus on other important things.
Removes emotion from trading
If you take out the emotion for traders, you are halfway there. Many times, a trade has gone wrong because a trader thought they could follow their nose.
They never tire
The FOREX market is open 24 hours a day, five days a week. You can seek out balance and pursue your other needs and desires.
Can be customized to meet trader’s needs
You can customize the bot to cater to your needs. You can keep refining the bot’s parameters until it works the way you want.
Highly efficient
FOREX bots can make instantaneous decisions. They do it by assessing multiple different input factors from the FOREX world to make rapid decisions every time. Humans cannot compare.
They speed up backtesting
Backtesting involves testing possible trading strategies using historical data and deploying the findings to create an optimized strategy. It can be difficult manual work, but bots can store and analyze vast troves of past data, giving traders the opportunity to test the effectiveness of different strategies before they hit the live market.
Traders of all levels can use bots
The wide availability of FOREX bot options means that even newbies can get up and running on a computer and start trading FOREX. Traders of all levels can start their bot-enabled trading journey at any time. However, you should be warned that some level of research will be required to improve your chances of success.
Cons
Of course, no tool is perfect, and FOREX bots are no exception. While they can help traders make huge profits, the same traders may also incur large losses. Here are a few cons of FOREX bots.
Data mining bias
This is when bots and their makers present favorable data-mined backtest results to would-be buyers of bots. Many times, this analysis was done on simulation, not real data. Some of the most vocal critics of these tendencies say that bots can no more predict positive conclusions than a human performing technical analysis. The advantage the bot has is that it is tireless, whereas humans have limits to their concentration span.
High initial investment costs
Some bots are free, but the best ones can be very expensive. If you are working with a bot, then you must invest in a FOREX bot-compatible trading platform like MetaTrader.
They're only as good as the programmer
A FOREX bot is essentially the work of a coder or programmer who has inserted a range of instructions that tell a trading API what to do. This means using a FOREX bot is leaving your trades at the mercy of a coder. These bots are only as good as the people who coded them, meaning you need to find a reputable FOREX bot coder with a good track record. In fact, seasoned FOREX traders learn coding to craft the perfect codes for their bots.
No guaranteed returns
Regardless of the claims many FOREX bot developers may assert, you simply cannot promise guaranteed returns when trading FOREX with bots. The opposite could happen, and you could lose money.
They may be a scam
It is an unfortunate reality of life that successful tools are commonly copied by crooks who are on a mission to make some money from interested buyers. As FOREX bots can be a confusing area to understand at first, it is not uncommon for scam bots to enter the market. They look like inferior knock-offs of real bots and they do not work, but by the time the trader finds out it is too late.
They struggle to pick up non-trending markets
FOREX robots are excellent at picking up strong surges in trends, and they can give good positive signals to take advantage of a trend, but they are less accurate if a price is oscillating. This presents a major problem in such a volatile market as FOREX.
Most bots work with scalping
Scalpers hold currency pairs for very short periods with the aim of making many small profits. Most FOREX bots are built along the same lines, and they seem to set targets and take profits of a few pips at a time. The complication comes if your chosen broker does not allow scalping. If they do not, then your bot is useless.
They do not have a nose for world news
FOREX bots are excellent at technical analysis, which is about analyzing historical markets and price charts to make informed guesses about what might happen in the future. However, what they lack is the ability to make sense of fundamental data, such as the bullish or bearish sentiments driven by major world events.
Do Bots Actually Work?
How you answer this is linked to what you expect from the bot. One of the most powerful applications of a trading bot is that it can enter trades without the need for human input (after it has received its initial instructions). The FOREX robots go about entering many trades in a day according to their algorithms. Already, this is a massive advantage to busy human traders who often do not have the time and energy to trade actively all day long.
Some would say this is a win by itself. Of course, all of this is done in the service of chasing profits. If you cannot make money, then what is the point of the whole exercise? The good news is that many bots are successful, with the provisos we have mentioned before. They need to be created by a reputable company, and they should be deployed as intelligently as possible, within their limitations.
For example, the best FOREX bots use backtesting in powerful ways to maximize profits for their human owners. Many professional traders have become enormously successful and would not change how they work with bots. So, do bots work? The answer is a qualified yes. The qualification comes from the fact that bots must be used wisely and with a full understanding of their drawbacks.
All bots work in the sense that they are programmed to automatically carry out trades. They are not watertight and, therefore, cannot guarantee long-term profits for everyone. Many bots work in the sense that they carry out their function and they make profits.
Some industry experts believe traders should not even use bots until they are proficient at manual trading. This ensures they know enough to be able to tell between a good robot and a scam. Before investing heavily in the latest FOREX robot, new traders can go far by using a demo trading account to increase their trading knowledge and help them understand what it takes to arrive at a profitable strategy and how to activate it.
What Are the Risks of Trading with a FOREX Robot?
All trading is risky, not least of all FOREX trading, which is a high-risk, high-reward investing game. FOREX trading can be doubly risky for newbie traders. Here are some of the most common risks to consider and understand:
Bad Algorithms
There is a common saying in the information technology world – garbage in, garbage out. The biggest risk for every FOREX robot trader is a bad algorithm. All FOREX trading bots are nothing more than pieces of code created by programmers to behave in a certain way under certain conditions. There is no uniformity in the quality of the programmer that puts the bot together. Naturally, the best bot sellers will attract and retain the highest quality programmers, but it is often the case that dodgy bot sellers use less-than-ideal programmers, and the inevitable result is a weak algorithm that does not gain you the profits you seek.
Flash Crashes
Even the most reputable FOREX trading bots with powerfully tested algorithms can lead to big losses for the FOREX robot trader in certain instances. For example, you could neglect to insert automatic stop-loss limits, leading to a massive runaway loss of profits. These so-called flash crashes are instances where traders lose huge amounts of value in no time at all. FOREX is a high-liquidity, high-volatility market, meaning that people relying on FOREX trading bots that are not set up perfectly could lose money quickly.
Robot Scams
This risk is one of the most prevalent in this space. Unscrupulous players have already caused traders to lose money by selling them inferior trading bots. With the FOREX market around the world being so large with so many disparate regulators and watchdogs, bad robot sellers can still thrive.
Indifferent Long-Term Performance
It is not uncommon for FOREX trading robots to deliver good profits in the short term, but lower profits and even lead to losses in the long term. This is mainly because bots are automated to follow patterns within a specific range, but they are not always good at sensing when a price trend breaks out of a range.
Automated Trading Strategies Defined
A FOREX trading strategy is a useful list of parameters you can use to trade currencies. Before the age of bots, manual traders would decide on an informed and researched strategy and follow it as closely as possible for the best chances of success. With the advent of FOREX bots, the principle remains the same, except bots can accommodate more detailed parameters due to their computing power.
Some of the tasks that highly specialized bots can perform include prompting traders to place a trade, commonly known as “signals.” Bots can automatically place and manage trades on your behalf, too. Some off-the-shelf FOREX robot systems come with their own in-built trading parameters. These plug-and-play bots serve a purpose and are normally used by newbies for robot-enabled FOREX trading.
Buying such a plug-and-play automated trading system is much easier and quicker than formulating one for yourself, especially if you are new to the game. However, if you are an experienced trader who has been frustrated by the lack of nuance and flexibility within the plug-and-play versions, you can take a stab at creating your own automated trading parameters.
Be sure to have a clear understanding of the robot you choose and have a detailed knowledge of its capabilities. It should be able to work in a way that complements your trading goals and ambitions and your personal situation. Things to consider before you go this route include:
- Order size: Make sure that your chosen robots work with an order size with which you are comfortable. Your strategy will inform your order size, and this may mean some bots are not for you.
- Trading results based on live situations: It’s easy to make grand claims about trading results based on simulations. Many dodgy bot sellers do this. Do not fall for this. Always check that the results promised are based on trading in the live markets.
- Backtesting: Check that the robot has been thoroughly back tested in as many different market conditions as possible for your chosen currency pairs.
- Credibility: As we have mentioned, a quick Internet search will give you clues as to whether your chosen bot seller is legit or not.
The best FOREX robots can give you suggestions on how to uncover profitable trades within volatile markets, even when the trends are not conclusive. These robots can select the best trend to give you greater profits and mitigate the risk of loss.
For most newbies, using a complicated and specialized piece of computer software to carry out all their trading needs can be very comforting. However, you still need to do some work, and you should always be on hand to make sure your strategy is yielding the results for which you hope.
Even the best automated trading robots require regular human interaction. If you are told by a robot seller that you can kick your feet up and do nothing, this is a serious red flag. Traders need to be able to distinguish between a scam robot and a viable robot that is worth purchasing.
Recommended Brokers
What Types of Automation Are Available?
There is a wide range of things to think about when inputting parameters into your FOREX robot. Most bots can effortlessly analyze vast amounts of data points in ways that humans could never do. It is important to know the different ways in which bots can be configured and what each type of automation offers:
Fully Automated
A fully automated trading system surveys the market for profit opportunities and executes trades on behalf of its user, based on a set of predetermined guidelines. These bots can be programmed to automatically generate stop-loss orders, trailing stops, and take-profits at the exact interval the trader stipulates. There are many important advantages a system like this offers:
- Speed: Algorithms can work faster than any human ever can.
- Discipline: Many traders trip themselves up by making emotional decisions. Automated bots do not suffer from this weakness.
- Time: For busy traders, a fully automated system gives them time to do other things.
If you are pressed for time and do not have that many hours in the day to devote to FOREX trading, or if you are easily swayed when faced with a complex trading situation, then a fully automated system is the way to go. Remember, you still must do some work. You cannot sit back and wait for the profits to roll in. The parameters you insert into the bot that drive your success need to be monitored.
Semi-Automated
A semi-automated bot scans the markets in search of opportunities based on pre-programmed parameters linked to your trading strategy. The difference with a semi-automated bot is that you receive trading signals from it with entry prices, stop-loss orders, and profit targets. The bot does not action anything, but merely informs you that you must decide whether to act on the information it is presenting.
In much the same way as full automation, the FOREX trading bot does much of the preliminary work for you. However, it is up to you to close the deal. This type of system is much better for the trader who has a little more time on their hands and who still wants to be involved in the act of trading on some level. Semi-automated systems allow you to keep control of your account and use your own skills and experience to augment what the bot is telling you.
How to Choose a Good FOREX Bot Seller
With all the charlatan activity going on in the FOREX robot space, you are advised to perform extra checks before your part with your money. Even once you have done all your research and you are about to purchase your FOREX robot, you can still run some simple sense tests that will make doubly sure the company you are working with is legitimate.
Reach out to the appointed regulator in your area. This could be a regulator such as the Financial Conduct Authority in the UK or the Cyprus Securities and Exchange Commission for much of the EU. You can request a current list of regulated companies that are operating in the jurisdiction. The best FOREX bot sellers will have taken the time to seek accreditation by the most powerful regulator in the land. If they are not on the regulator’s list, it is not a final disqualification, but it should spark some questions.
Alternatively, you can run a Google search for popular terms like: “Best regulated FOREX robot seller,” “Regulated bot seller” or some variation of these terms. Finally, there are handy tools like Forexfraud.com, which has a useful list of brokers to spurn. Alternatively, you can visit whois.net to check whether the company’s domain is registered in the same name as the company, and when the domain was incorporated.
The Bottom Line
The FOREX market is evolving all the time. It takes a great deal of experience and know-how to enter and exit the market at just the right time. Bots can be a replacement for this hard-won experience; but buyer beware, some bot packages cost many thousands of dollars while others are free. This means there is a wild swing of effectiveness between the best and the worst products out there.
Paying the most money for a bot does not guarantee profits, this does not need to be repeated, but there is validity to the idea that you get what you pay for. If something seems too good to be true, it probably is. Ask as many questions as you can and proceed with caution before you invest heavily in a FOREX trading bot.
Once you have made your purchase, it can be easy to think your job is done and you can relax while the robot system does all the work for you. This is a bad idea as you still need to do some work. A high-quality FOREX robot may have a role to play as part of your trading strategy, but successful trading requires the human skill and effort that a robot cannot replace.
FAQ
What is a FOREX trading bot?
A FOREX trading bot is an algorithm that uses artificial intelligence to carry out FOREX trading activities according to predefined settings and parameters, such as the conditions under which it will buy or sell.
Is it safe to use FOREX trading bots?
FOREX trading bots are safe to use, but traders need to be aware of their shortcomings. Not all bots are developed equally, and some inferior bots can be a waste of time and money.
Are FOREX trading bots free?
As with many applications, there are both free and for-sale FOREX bots on the market. While there are a few trading bots that can produce results despite being free, the success ratio across the spectrum of free bots is not encouraging. Traders are advised to invest in a commercial option, usually through a monthly subscription. The cost of FOREX trading robots varies significantly, from free options to some trading bots that cost thousands of dollars, although these can be purchased for a monthly or yearly subscription price.
Can a FOREX robot trade cryptocurrency?
Yes, the technology and principles that underpin FOREX robot design can be applied successfully to crypto bot design. There are fully automated crypto trading robots on the market.
Does a FOREX trading bot work all the time?
FOREX trading robots can be programmed to work as much or as little as you need them to. At the top end, they can be instructed to trade constantly, 24 hours a day, seven days a week. At the lower end, traders wishing to be more involved in the trading process can use bots episodically.
How do you use a FOREX trading robot?
To begin, you will need to find a brokerage that grants you access to the trading software's application programming interface (API). This is not something all brokers do. However, if your broker gives you its API, you will need to program the bot according to a defined strategy.
Are FOREX bots legal?
The use of FOREX robots is legal in many countries. However, being legal does not mean that all bots are reliable. Some highly legislated countries do not support FOREX trading at all, such as Belgium, France, and China. Naturally, bots would not come into a conversation in these places.
Written by
Marwan Kardoosh
The Editorial Department at Arincen makes an important contribution to the world-class content that can be found on the site. Arincen’s Head of Content and Chief Economist Marwan A. Kardoosh brings with him over 24 years of experience working in the...
Edited by
Adrian Ashley
Adrian Ashley is a seasoned business and finance writer. With a corporate career spanning over 20yea...
Fact Checked by
Bahaa Khateeb
Bahaa Khateeb is currently the CEO of Arincen, a start-up Fintech company based in Haifa. Baha...
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