Forex Robots: A Trader’s Biggest Dream or a Nightmare?

With more people jumping onto the Forex trading bandwagon than ever, Forex robots are popping up all over the place, like mushrooms after a good rain. They promise untold riches and many who are new to the world of foreign currency trading get their credit cards out, falling for the lines. However, this is not to say that a Forex robot isn’t an asset, as long as it is used properly.

What Are Forex Robots?

Forex robots, or expert advisors, are pieces of software that open and close trades on the foreign exchange market according to preset conditions. As any professional trader knows, the key to profitable trading lies in having a solid strategy and sticking to it. Well, a Forex robot executes that plan, no matter what, basically removing the biggest problem most people have when trading, namely human emotions.

A Forex robot works according to a particular algorithm and executes trades automatically, opening and closing positions according to its presets. These algorithms are designed by experienced traders and have been proven to be effective.

However, this is not always the case, as you will see later on, and this is why some Forex bots have gained a bad reputation.

The Benefits of Forex Robots

Automated Forex software can be programmed to search for potential winning trades from a selection of currency crosses. The software is designed to analyze the minute changes in the market using real time data to identify any trends in the pricing movements.

Once a trend has been identified, the software is able to place a trade automatically through a trader's account for that particular currency pair. The software monitors that trade until a profit has been realized. It then closes out that trade automatically at the point it was instructed to, regardless of whether the market continues to rise or fall.

This level of automation allows a trader to increase the likelihood of realizing a profit on trades placed via the software.

Removing Emotional Input

It is a well-known fact that objectivity and a cool head are vital to profitable trading. The temptation to remain in the market while pricing is moving in favor of your currency pairing is very strong in many people. The emotion behind this action leads them to believe that they could end up making a larger profit.

Unfortunately, the Forex market can be extremely volatile. Sharp pricing swings are very possible, and have the capacity to create large losses for those traders who base a trade solely on emotion rather than logic.

However, we are still humans, no matter how hard we try, so it can be extremely hard to disconnect your emotions from trading. In fact, it can take years for some traders to learn the art of leaving their emotional responses at the door when they start trading.

Why are emotions such a drawback on the foreign exchange market? It’s basically the same principle as a casino. The more you win, the more you want to play until you eventually start losing all your earnings. Likewise, the more you lose, the more you want to play to recover your losses. The same inherent principle also applies to many Forex traders. The goal is to quit for the day while you’re ahead but also if things aren’t going your away.

However, most people are unable to do that and instead of seeing what the market is actually doing, they only see what they hope the market will do. That’s how they end up stuck in trades that can clear out more than half their capital in one movement of the market.

This is where a good Forex robot can be an asset. Being a computer program means that it executes trades only according to certain conditions, with no emotions involved. Thus, if it is designed to place three trades a day, it won’t go against its programming and make five, even if all three trades were profitable. If it is designed to exit a trade with a stop loss of 10 pips, it will close the trade, even if at a minor loss.

It is a Forex robot’s ability to exit losing trades on target that actually makes it far more profitable over the long term. Those losing trades are the ones that turn into nightmares for most traders because they stay in the trade, hoping the market will turn around and move in their favor once again, which rarely happens.

The Drawbacks of Forex Robots

The problem many foreign exchange traders encounter with robots is not necessarily with the robot itself but with the trader. This is because novice traders purchase Forex robots without actually understanding how they work. Some Forex robots work only under certain conditions, while others might need some adjustments. Yet, if a trader doesn’t understand the market or the particular algorithm, they will soon find that they are losing a lot more money than they are making.

This is why it is essential for any Forex trader to have a good understanding of the foreign currency market and of trading before they resort to any automated system.

Another problem with Forex trading software is that, as with anything, you get what you pay for. There are plenty cheap Forex robots available that don't work.

Think of it this way: a successful Forex trader has the potential to make hundreds of thousands a year placing trades on the foreign currency market, so why would they sell their system for $30? Obviously, they wouldn’t. This isn’t to say that all low-priced Forex programs are useless, but don’t rely on them in full, especially on a live trading account or you might find yourself with no money left to trade.

Forex robots can be both a nightmare as well as a dream. The key lies in choosing a good expert adviser that has been thoroughly tested using historical data and proven to work. Even then, never use a Forex robot on your live account before you have tested it yourself extensively on a demo account.