When exploring the financial markets, it is often difficult to differentiate between the various forms of trading that exist. More traders are using forex robots in the UK than ever before. We look at the different trading methods and why forex robots are so popular.
Methods of trading
Trading can be divided into three broad categories these are;
Manual traders rely on experience, hunches, instincts, and research when buying or selling currency pairs. They often have specific strategies, but this will vary from trader to trader. These strategies may be guided by the price action of the currency pair, economic news releases or other factors.
Algorithmic trading involves placing trades on behalf of an individual according to a detailed “set of instructions”. In finance, algorithmic trading is used by hedge funds and other asset managers who employ automatic programs that follow a defined set of instructions for placing a trade, including timing, price and quantity, into the marketplace without human intervention or emotion.
A ‘forex robot’, also known as an ‘EA’ or ‘expert advisor’, is software that automatically uses historical price data and mathematical calculations to generate buy and sell signals. The use of forex robots can be traced back to the late 1990s when traders could only test their algorithms on the demo accounts that brokers offered; since then, there has been much improvement in technology, and due to this, many retail forex brokers now offer these tools as an add-on service.
Although trading using a robot may seem like an easy option for novice traders, in reality, it is not always the case, and they will need to know how to correctly implement or backtest their strategy before risking money in live trading conditions. Even experienced traders who rely heavily on manual trading often use forex robots to generate fresh ideas or assist with strategy development.
Forex robots are far from perfect, and even the best ones may require some level of user input to generate profitable signals. Not all robots will suit every trading style, and traders must find one that suits their own needs and requirements.
There is a misconception that these EAs are used because they provide infallible recommendations; however, even the most sophisticated robot trader cannot predict market behaviour with complete accuracy. This means that it can be considered high risk compared to manual trading techniques.
Top reasons why British brokers use forex robots
Traders who make use of forex robots often do so for different reasons such as;
These EAs can be set up quickly on a trader’s existing account, enabling them to place trades without monitoring market activity every hour of the day. Traders who use these tools often do so as it helps them manage their forex portfolio more efficiently, freeing up their time for other productive activities such as family and friends instead of sitting in front of a screen.
Algorithmic traders require less time than manual traders, and this means that they can analyse and act upon currency prices much faster than humans, which is crucial for active traders during news releases. Therefore, those who implement algorithmic trading strategies will react more quickly than the rest of the market resulting in earlier entry and exit points.
The use of forex robots enables brokers to cut costs as they do not require an entire back office team, and instead, they can pass these savings on to their clients by way of lower spreads. Many brokers who employ algorithmic traders usually offer them a free service, which means that manual investors can still enjoy trade 24 hours per day without paying extra non-activity fees.
However, clients need to consider using such tools as part of their trading strategy to ensure that they receive realistic results from live testing before risking any money on live accounts. Saxo Bank offers an excellent demo account for beginner traders; click to read more.