Augmenting your Trading with Algorithms
There are a number of ways you can trade FX, but doing so through automated trading systems has become increasingly popular with sophisticated retail investors in recent months. These systems, which use complex algorithms to produce automated trading signals, can be bought and uploaded over the internet by investors and plugged into a forex trading platform.
A key advantage of using automated trading systems is that they enable you to manage your forex portfolios according to a set of pre-determined rules. They therefore tend to be less time intensive than self-directed trading, because trades are executed automatically and emotion is removed from the equation.
However, before investing in FX through an automated system, there are a number of points you should bear in mind.
Most importantly, you should find out whether the overall forex trading strategy provided by that system matches your investment objectives. For example, if you have a low risk strategy, your automated trading system should be less aggressive, allowing lower levels of leverage and consistently using stop loss orders to limit the downside risk. On the other hand, a trader with more aggressive trading objectives may choose a system that uses higher leverage levels and trades more frequently.
Similarly, you should do comprehensive research to make sure the system suites the current market conditions. For instance, a system that works well when carry trades are popular might not be suitable at a time when market movements are being created mostly by trading trending currency pairs – and vice versa.
Next, you should ask, is the system logical to me? A relatively novice trader may look for a straight forward system that uses stock standard procedures, e.g. having two moving averages with trades executing when they cross. A more advanced trader may look for a system with complex algorithms, e.g. one that involves sophisticated time series for complementary currency pairs.
Once you have found an appropriate trading system, you should find out who developed the software, and research their background and experience before completing a thorough back testing. The back testing should include an evaluation of the leverage used, the swings in profits and losses, consideration of the max draw downs and the profitability of the trading system after all costs including any commissions have been paid.
Once underway, it is important to continually evaluate your system to ensure it is delivering the results you are looking for within the current market conditions. Indeed, the rules are the same: whether you are trading on your own or using an automated trading system to augment your trading, remember to keep within your investment objectives and risk tolerances at all time.
For more information on automated trading, as well as solutions offered by Deutsche Bank to sophisticated retail FX investors, please visit www.dbfx.com.
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