So you’ve heard about these new things that auto trade the currency markets you and you’re thinking “This doesn’t quite make sense”. Understandable. I mean, how can something know when to enter and exit the market, determine how much to risk and grow your bamk balance without any human intervention??
Sounds quite far fetched, right? And it is. To the uninitiated that is.
Well, “far fetched” it may sound, but reality it is.
Trading Robot History
Trading Robots, that were historically known as “Black Box” solutions, made their first appearance back in the 80’s when the game was stock index arbitrage – where traders were buying (or selling) in the futures market and selling (or buying) a set of matching stocks on the NYSE. A trade was only placed if the difference in price of the two was large enough to make a profit. All orders were programmed into a computer and executed automatically. The capital required for such a trade was significant which prevented the majority from taking part in this game.
Nowdays, the playing field is much different. Ma and Pa retail investors can also take part in auto trading and the barriers to entry are extremely low.
The Foreign Exchange (Forex), Commodities and Metals markets can all be traded via automated trading robots and the most popular trading platform to trade robots is Meta Trader 4 (more commonly known as MT4), created by a company called Meta Quotes. MT4 is then supplied by Forex Brokers to their clients free of charge so their clients can place trades through their firm.
What are Forex Robots?
A Forex Robot (aka Expert Advisors, we’ll call them EAs for short from now on) is a software program, i.e. a page of code. For the MT4 platform it’s written in Meta Quotes Language (MQL) which is a programming language similar to C# or C++ (other trading platforms use different programming languages).
When an EA developer is coding the EA he/she will use another program called Meta Editor. The finished page of code is saved either as a .mq4 file (which means others can edit it) or a .ex4 file which hides the code from editing.
The .ex4 file is then saved by the trader into the “expert advisors” folder of the MT4 application. This is usually located in the “Program Files” folder on your C: drive. Most EA developers provide detailed installation steps to make this process as easy as possible. Some even provide installation files that install the software automatically.
How do EA’s work?
EA’s are based on algorithmic trading strategies where code is written to execute a trading strategy using the trading tools (indicators) found in MT4 along with whatever else makes up the traders strategy, e.g. Candle stick OHLC, price patterns, other timeframes, other currency pair behaviour, past trading behaviour. You name it, someone has coded it and used it to create an EA.
EA’s are capable of entering and exiting trades, along with determining how much to risk per trade, whether it be a fixed Lot size or variable depending on your capital. They can also scale you out of positions, maximizing your profit or minimizing your loss. There are a number of strategies that can be implemented using an EA, some traders used them as sophisticated indicators that assist in their manual trading.
By now you should have a good understanding of EA’s.