Forex Trading Strategies And Automated Trading

Some Forex trading strategies are considered more suitable for position trading, while some others are referred as best used in the day trading. These are apparently two opposite approaches. Day traders enter and exit trades multiple times during a trading session, and don’t leave positions open overnight. On the contrary, position traders can wait long time, maybe months, for their favorite trading setup to enter the market, and then stay in this position for possibly even longer time.

But, taking a closer look, these approaches don’t really seem that different.

It is known that markets are fractals by nature. By definition, this means that on every time interval it has the same statistical behavior. So, it is quite probable, that the trading pattern that a position trader is waiting for weeks on 4 Hour graph, can be observed every day on 1 Minute charts. Most probably, with lesser magnitude of the market moves.

We can assume the biggest difference between the two scenarios in the example above might be in market timing. Taking a good position is critical while trading on the short time intervals. It can also be technically demanding, so here is where automated trading comes into picture. A trading software can enter the market faster and better than any trader. This is especially during fast moving markets. Algorithms can also exit the market better, using more sophisticated techniques than convential trailing stops that all trading terminals provide.

In addition, automated trading also makes it possible to avoid human errors and overcome the main failure factors of trading – psychology.

Not less important is that automated trading frees the trader’s time. However, having the automated trader running on its own for a long time places too strict requirement on its algorithm, so we need to find a reasonable trade-off between algorithm complexity and time savings.

Speaking about day trading, in the case of automated trading, we can actually extend that definition and consider week trading instead, where all positions must be closed by end of day Friday. The rationale behind that is that Forex markets are open round the clock during weekdays. Sunday is the only time when we can have gaps at the opening.

So the first conclusion from this is that in the case Forex trading strategies are automated, they can be effectively tested using market data for short timeframes. At least that is directly applicable for the strategies that are using indicators.

Another consideration is that automated Forex trading strategies can be much more complicated and aggressive. Relying on the algorithm in execution such moves that a trader simply can’t do manually.

Let’s take an example. Suppose the market is trending up. The software is running the trend following strategy. But nothing prevents us to simultaneously run the same strategy in the opposite direction – only on shorter timeframe. So the big picture is try to fix profit after major moves up, then shorting the market to catch sharp pullbacks, and then re-enter the market in the direction of the main trend.

This so called “knife catching” can be very dangerous in manual trading, but using the software it is a viable approach, especially using proper risk management.

Forex Trading Strategies Without Indicators

Forex trading strategies without indicators is another interesting area where trading automation fits perfectly well.

Any indicator is lagging the market. Making trading decision based on such information is more suitable to position trading, which in turn doesn’t require automation.

The longer is indicator timeframe, the more reliable the indicator should be. But the value of this “reliable” information decreases in the same proportion. First, because it comes with a delay. Second, because it is common knowledge. Everybody and their grandmother follow RSI, ADX, MACD etc.

And last but not least: essentially all indicators are derived from the prices anyway. So not using indicators, we can inplement our Forex trading strategies so that they react directly at price actions. And by its nature this will only work well if we use automation.

 

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