Recently there has been a lot of discussion about the difference between the automated trades and manula trades. In this article we will try to explain the pros and cons of each.
Manual forex trading
Trading manually allows you to negate one of the weaknesses of algorithms – the fact most of them do not take the fundamentals into account. As mentioned above, a major event can impact the markets significantly. Traders can decide not to look at the charts ahead of crucial announcements, like an ECB meeting, as they bring too much uncertainty to the table.
Furthermore an experienced manual trader can realize when the market conditions have changed, without a major even occurring. If you trade a trend following system and the market simply slows down, trading in a 50 pip range for a few weeks, the manual trader will adjust his approach.
This may sound weird to you, but expert manual traders can outperform a system, which trades exactly like them. This is due to the fact he may choose not to enter certain set-ups, or take his profit earlier in other cases, if he feels like it. This can happen, if the trader in question enters what Marc Douglas describes as “the zone” in his aptly named book “Trading in the zone”. Some days you just can’t make a wrong decision, where as an automated system will always take the trade it is designed to.
A few tips
After looking at the major advantages and disadvantages of manual and automated trading, we would like to give you a few tips, if you decide to go down the robot path:
Know what your robot does. Have you developed your algorithm from scratch, or have you bought it from a vendor? If the case is the latter, be sure to get at least a basic grasp on what the robot actually does. Some variations of the risky grid-based and martingalesystems are fairly popular among providers of EAs. Although they may appear attractive, they will most likely fail in the long run.
Know when to simply pull the plug. Some automated systems perform well in trending markets, while others do better in a range. Markets will switch between the two general states, and you should have some idea of when this happens. This requires some experience and following the news, but nobody said automated trading is a “set and forger” way of making money.
Some EAs have a news filter – a measure which makes them not trade whenever a major releases are approaching. Others even scan the information and make trading decisions based on them. These are fairly advanced algorithms, which require some development experience.
Backtesting can be missleading. Whether you are looking at your own bakcktests or the ones provided by a company, trying to sell you an Expert Advisors, there are several things you need to know. A strategy can have amazing results, which can not be replicated in real market conditions. This happens when the system is overly optimized, or “curve-fitted”. There are many factors, which will most likely make it perform differently in the future. For one, although market moves tend to repeat themselves, they do not do it with a 100% accuracy. On top of that, if you are trading with a dishonest forex broker, slippage may start being more prevalent, if you have a few winning weeks.
Whether you like it or not, automation will stay and affect many areas of our lives in the future. Hopefully we presented you with some solid arguments for and against automating your forex trading. To summarize everything, algo trading has some advantages over manual trading, but does not require less effort, by any means. You should read a lot more than this post, in order to really get better. If you are looking for a “set and forget” system, which will continuously make you money, while you are on the beach, you will probably be disappointed.