Auto-Trading: Have traders found Aladin’s Lamp?
Posted with permission: Vincenzo Desroches of ForexCharts.Net
Auto-trading has received a lot of attention in the Forex community ever since the MetaTrader platform made backtesting tools more accessible to a majority of traders. Including tools like forex charts. As with most subjects in forex, auto-trading is a valid, and useful tool made dangerous through hyperbole and marketing tactics. It is useful as a trading aide to the already accomplished person who does not always have the time to actively trade the markets to exploit favorable conditions. But it is by no means a method that will help a novice magically turn his ignorance to blissful success through some computational wonder. Let’s take a look at the subject in greater detail.
Computers are dumb
Computers are dumb in the sense that they don’t learn beyond a very basic level, and they repeat the same patterns instructed to them at all times. They have no intelligence and are limited, by definition, to the skills of the person who supplies the algorithms.
The computer will only trade as best as the provided instructions allow
The simple result of the previous paragraph is that a trader who has problems with manual trading, and who lacks a good understanding of market dynamics, and the fundamentals of analysis, is highly unlikely to be successful just by making use of a computer in auto-trading. Perpetuating and automating a faulty approach can by no means transform that approach to a successful trading strategy.
There’s no perfect strategy
And yet, many traders simply backtest a favored strategy, automate it, and expect to do well over the longer term in spite of the common knowledge that there’s no single perfect strategy that will always work when applied to the market over the longer term.
Auto-Trading requires confidence and education on the part of the trader
Many traders favor auto-trading because it is supposed to reduce or eliminate the emotional problems associated with manual trading. Yet it is no harder to interrupt an auto-trading mechanism than it is to change direction in a simple manual trading method. Of course, one can buy a black box method and remove the power to intervene completely, but that is blind trading, and hardly a solution to the main problems of managing an account.
Forex robots are probably not very useful
Forex robots are another development on the auto-trading approach, but in this case instead of devising your own tool you buy it from an online salesman. We strongly advise against this approach in general because the vast majority of these tools are useless.
Conclusion: Auto-Trading is suitable to a flexible trading strategy when applied judiciously
Auto-trading can be useful if employed on a limited basis to the application of well-developed strategies which the trader has an intention of applying for a long period of time. Auto-trading will not work with a blanket approach, nor will it generate favorable results with the aforementioned black-box methods where you buy a program and apply it without knowing what it is doing.
A trader must still master forex analysis to create workable auto-trading strategies. And skills in money management are just as crucial as they are in ordinary, hands-on trading activity. In short auto-trading is bad and useless when it is made a myth, but it can be an efficient tool in the hands of a trader who has already mastered the lessons of online forex trading.
Vincenzo Desroches of ForexCharts.Net
