Is Automated Trading Right for You?

04/11/2012 2:35 pm EST

Focus: FOREX

Rob Booker

Author, Man Vs. Market: Lessons from Trading on the Road

The forex markets are well-suited to automated trading, explains Rob Booker, who addresses a number of issues and key concerns for traders looking to make the jump to automation.

Automated trading is coming up a lot today for traders, but how do you automate your trading strategies, and it is a good idea to do so? Our guest today is Rob Booker to talk about that.

So Rob, first of all, should I go about trying to figure out how to automate my forex trading strategies?

Well, "should" gets thrown around a lot, but this is a big one. This is a big decision for somebody to make, to automate a methodology that they’ve become fond of in the markets.

There are two things that occur to me when someone is thinking about automating a strategy. First, forex is a really good market for the automation of strategies because if you find something that’s going to work for you, the execution is good, spreads are good, and the software is pretty reliable.

Most people utilize the MetaTrader platform and an expert advisor, and there are thousands of programmers for MetaTrader.

So first notion is that there’s a lot of expertise available, and the software has been around for a while, so it’s definitely a possibility. That leaves open the question of should somebody really take that jump into doing it?

We’re probably not reinventing the wheel in terms of the strategy, it’s probably already out there, so should I just go out and find somebody who has already written something similar and then just buy it and plug it in?

That’s a great question. There are two ways that someone can go about it, and that’s the second part of the automation: what am I going to automate?

You can take an off-the-shelf robot, something that’s been pre-built and then just plug it in, but you don’t really understand what it’s made of.

My suggestion is a little bit more complex than some people would want to hear, but I recommend somebody take the rules that they’re following on a regular basis, the ones that they know have worked for them, and then find a programmer. There’s a lot of them out there.

Some firms will even subsidize the cost of that programming, and you can get something that you created instead of maybe taking something right off the shelf.

Then how far should I take it? Do I want it to find the trades, execute the trades, and get me out of the trades, or do I just want the signal and then I’m the one that actually pushes that button?

When I use an automated strategy, I’ve done it in two ways. One way that I really like is the full automation of a methodology that takes the trades, executes the trades, spits out the report, and then it’s all done. That’s really worked really well for me in strategies that tend to open trades in the middle of the night when I’m not going to be awake.

Another way to use automation that most people don’t think about is as a trade assist. There are off-the-shelf programs available for MetaTrader, for example, that can move a stop losses to break even or trail a stop or stage the entry so you can pyramid into a trade or scale out of a trade.

These are methodologies right off the shelf that are trade assists and don’t necessarily have the logic for entries and exits, but that will take over once you’ve made the trades you like.

So you don’t have to sit there and watch the charts forever, and it’s just mirroring what you would want to have it do from a risk management perspective.

I highly recommend that people take advantage of some of the tools that are available right now all over the Web.

NEXT: Important Questions to Ask Before Buying

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Forex, for whatever reason, attracts a lot of the robot-style $5000 programs. What kind of questions do I need to ask before I invest in anything like that?

First of all, you should be able to run the robot on a trial basis on just one currency pair for a week or something longer. Two, you should be able to speak to and correspond with real people who have implemented it in the past and have had some success with it.

A lot people look at equity curves. The third thing to look at isn’t just an equity curve, but returns on a rolling basis, and something that’s called the "sharp ratio." It sounds all mathematical and crazy, but someone should look at the amount of return they can expect to get in exchange for the amount of risk that they have to take.

So they should compare the maximum drawdown possible over the years to that equity curve and make sure they’re making an informed decision based on people they’ve met who have implemented it.

Most of all, get a chance to operate that expert advisor, or that robot, on your own, and on a platform, and see it operate live. Make sure that it can actually execute the trades the way it claims to be able to.

Anybody legitimate shouldn’t have any problem offering that, right?

Yeah, anyone legitimate should probably offer the whole thing available in some way, shape, or form for a very affordable amount of money.

These are not complex programs that take a long time to write, in most cases, no matter what anybody is going to tell you.

The other dirty little secret and problem with MetaTrader is that 90% of all robotic methods can be reverse engineered, or cracked.

The code can be decompiled with a simple, off-the-shelf program, so anybody that’s offering it is really offering something that underneath the surface isn’t as valuable as maybe the training that goes along with it, the knowledge of how to implement it, and what the settings should be.

The real value is in the risk management, the training, and those types of things. The code itself can probably be reverse engineered, so it’s really not even worth as much.

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