What Are Forex Bots, and Do They Really Work?
After you finish this article, you'll clearly understand what a forex bot is and how it works. You'll also be able to identify whether it is effective for you, the pros and cons and whether you should use such a program in Forex trading.
What Is a Forex Bot?
A forex bot is a trading software installed on a trading platform. This programme can independently open and close trades.
Each forex bot is based on the trading system.
A trading system is a set of rules which dictates how all the trades are opened and closed.
Usually, this system only gives signals to the trader, who then decides whether to open a trade or not. If there's a bot based on such a system, it can replace a trader.
How Does a Forex Bot Work?
Let's take a closer look at the principles of bot trading using a simple trading strategy with one moving average. If a trade based on this strategy is conducted manually, the process will look like this:
- A moving average with a period of 10 is plotted on the chart. This moving chart will show the average price for the last 10 timeframes.
- The price moves more sharply than the moving average and periodically crosses it.
- If the price crosses the moving average from the bottom up, it's a signal to open a buy trade.
- If the price crosses the moving average from top to bottom, it's a sell trade opening signal.
- An open trade is closed when the system signals in the opposite direction. The trade will be carried out constantly, and its direction will be selected depending on the direction in which the price crossed the moving average.
This strategy is given only for the sake of an example, as it's the simplest. However, because of its primitiveness, it would be ineffective in real trading and would give many false signals.
To create a bot, you need to create a programme that will consider all circumstances. Even a novice programmer can easily complete this task.
It's quite simple to write software for a trading strategy with one moving average: you just have to state several conditions in the program code and assign the execution of the opening and closing functions to the bot.
It'll be a little more difficult to create a bot based on a full-fledged trading system with 3-4 indicators and the separate conditions for exiting the trade with the help of stop-loss and take-profit orders. However, both of these programs will be similar in principle. Only the number of conditions and lines of code will change.
When the bot is written, the only thing left is to add it to the trading platform. It's quite simple when using Meta Trader platforms. They provide special functionality for bot trading. Next, click the start button, and the bot will open and close trades based on the trading system embedded in it. You can stop trading with a single button.
As a rule, the trader can always change the bot's transactions. For example, if a trader believes that it's time to close a trade, even though the terms of the trading system require it to stay open, they can do so. Then the bot will simply wait for the signal to open the next trade and continue trading in the normal mode. However, there are pros and cons. The trader may notice factors unavailable to the bot; its decisions can be affected by human emotions, which always harms the trade and worsens its result.
How Effective Are Forex Trading Bots?
It's hard to say whether forex bots are effective. Every bot is based on a system, and it's the basis of success in forex. It's not always enough to simply open and close trades following system signals to make a stable profit. Often, the trader is also required to conduct an additional analysis of the situation and make quick decisions taking into account new factors. The bot is deprived of this ability.
Indeed, patterns can be found in the financial markets. After studying these, the analyst can create a system that will generate stable signals. You can make a bot that will also effectively trade using this system.
However, there's one significant problem with this success formula: the market is constantly changing.
A system that worked yesterday could become unprofitable tomorrow. And since any system generates both true and false signals, it won't immediately become clear that it stopped working. The bot, based on such a system, can continue trading for days and weeks and increase the loss until the trader realises this.
The market changes unpredictably, and it can cause a bot to give more false signals than the right ones.
All of the above applies only to the situation when a trader uses a bot that analyses the market, creates systems and writes software. Or if it's done by a team of professionals working together on a common project. If a trader buys a bot from third-party developers, the chances of profitable trading are minimal with too many risks. First of all, only the creators know the true age of such a bot. Also, if the trader isn't keen on programming, it's unlikely that they'll understand whether they buy a working tool or a dummy with fake statistics.
Pros and Cons of Forex Bots
To better assess the effectiveness of trading bots, let's consider their advantages and disadvantages. We'll also compare them with manual trading.
As you can see, all factors considered, bot trading isn't as effective and convenient as manual trading.
Trading with the help of forex bots has its pros and cons, but disadvantages prevail. Although bots allow you to remove emotions from the equation and can process a large amount of information, their artificial intelligence isn't enough to compete with human traders.
As a compromise, you can consider trading with expert advisors. This is a type of trading software. Its main difference from the bots is that it only gives signals to the trader but doesn't make decisions or trade independently. The EA is a complex indicator that combines several formulas and gives the clearest and most specific signals.
Regardless of whether you are going to trade with the help of an expert advisor or decide to study the charts yourself, you'll need a certain knowledge and skills base. You can find enough information about forex, CFD, binary and stock market trading on the Internet.
To practice and perfect your trading skills, consider using the Libertex platform for forex CFD trading. You can open a completely free demo account there. It has a user-friendly interface that is designed both for the expert trader and beginners.
Disclaimer: The information in this article is not intended to be and does not constitute investment advice or any other form of advice or recommendation of any sort offered or endorsed by Libertex. Past performance does not guarantee future results.
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