To answer the question that is the title of this article, we should first look at several definitions. To begin with, a forex robot automatically initiates trades and trades for you based on a set of pre-programmed criteria.
However, whether the robot will actually trade profitably depends largely on the market situation, as well as the specific parameters and trading rules that were programmed by the developer.
What is a Forex robot?
It probably makes sense to first clarify what an automated trading robot is not. This is not a physical-mechanical robot that sits in front of your computer and trades for you.
A Forex robot is an automated trading system that consists of a software application programmed with special rules and parameters, and which has been specifically designed to initiate and liquidate trades.
Many automated forex robots take the form of so-called experts or advisors that run on the popular MetaTrader trading platform. These trading systems are known as experts because they “advise” the trader when to initiate and liquidate positions using the MetaTrader software.
Why do traders use robots?
The main goal of Forex robots and experts is the ability to manage your money in the Forex market automatically without the intervention of a trader. In other words, the robot or expert initiates and liquidates trades without the trader having to sit at a computer or do anything manually.
Forex robots can effectively find optimal entry and exit points for trades, calculate position sizes, and execute transactions according to the rules of a predetermined trading plan.
Depending on the level of risk a trader is willing to accept, most forex trading robots can initiate positions according to a set of parameters and signals set by the trader based on one or more technical indicators or price levels.
How do Forex robots work?
Most forex trading software is based on technical analysis and, as a rule, advisors work in a similar way, regardless of what type of trading system the trader uses.
Buy and sell signals are generated by the forex robot depending on market conditions and technical signals based on past and present price levels, as well as specific technical parameters selected by the trader.
As a result, the trading robot generates a buy or sell signal when all market factors and trading conditions in the trader’s plan are met.
Although virtually all forex robot systems currently on the market have default settings, these settings can be adjusted to suit the risk and capital requirements of each individual trader.
The following screenshot shows an example of an Expert Advisor running in MetaTrader 4.
The white text between the horizontal red lines in the top left area shows various trading parameters such as the current stop loss level, number of currently open orders, target take profit, next lot size.
The red and blue arrows overlaid on the price show where positions were initiated and the white text represents the result in terms of trading in pips. The graph in the indicator box at the bottom of the image shows how the total trading account balance and trading account funds have changed over time.
Different types of robots
While some trading robots are completely self-contained and operate as stand-alone computer programs, others, such as the popular “advisors” running within MetaTrader, can work in conjunction with other price monitoring software.
To use the MT4 robot, the user must first have a live trading account, then download the MetaTrader 4 software on their computer and have a working version of the advisor software that can be used with MT4. In many cases, a demo account can be used, which allows the trader to test the advisor's software.
Standalone packages typically offer an automated robot trading platform, which in most cases includes its own data feed and trading signal generator. This type of trading system is usually offered on a subscription basis, where the trader is charged a monthly fee.
Possible profitability
Regardless of the type of system used, some analysis can provide insight into which robots are the best and how successfully different types of software can be used to write robots. However, it should be remembered that many reviews of forex trading systems are not genuine, and therefore often give an inaccurate picture of the profitability of the product.
The best way to evaluate the profitability of a system and whether it will work for a currency trader is to take a hands-on approach to see how suitable the software is for the trader. By downloading the trial software and learning how to backtest in MetaTrader, a trader can get a more accurate and informed assessment of the potential profitability of any forex trading robot they are considering buying.
To determine whether a particular trading robot will trade profitably, the system must be backtested with historical data using default parameters to see if the system produces positive results.
Additionally, most forex robot packages offer a free trial subscription so the software can be tested before transferring funds to a live account. The trader can then test the software by entering their own parameters to determine if the robot will trade profitably with their trading plan.
Advantages of Forex robots
Automated forex trading systems can be effective tools for determining optimal entry and exit points, calculating position sizes, and executing transactions according to a trading plan.
Depending on the level of risk a trader is willing to take, most forex systems initiate trades according to an optimal set of predetermined signals.
Some of the notable benefits of using forex robots are:
- Affordable – Trading systems are extremely easy to purchase and download and can be set up and used within one hour.
- Automation – Most forex trading robots offer fully automated systems, allowing the trader to concentrate on other activities while the trader's computer trades tirelessly around the clock.
- Eliminate the Emotional Factor – Human emotions can be extremely detrimental to the trading process for beginners and professionals alike. Automated trading eliminates this element, which carries psychological pitfalls for all traders.
- Programmability – Automated trading systems typically provide full programmability, allowing the trader to adjust risk levels, profit levels, and other variables. Optimizing the parameters of an automated forex system to initiate and liquidate trades is one of the keys to increasing profitability when using these types of systems.
Almost all automated trading forex systems are based on a technical analysis approach and generally work the same way, regardless of which software package you choose to purchase. Buy and sell signals are generated based on market conditions, with the software interpreting technical signals based on historical and current levels.
Once certain technical parameters are reached, a buy or sell signal is generated and the robot's software executes the trade. These technical parameters are adjustable, allowing the trader to set their own levels for generating buy and sell trades.
Example of an automated trading system
As an example, let's assume that a new high has been reached in the AUD/USD exchange rate. Depending on the configuration of the Forex robot's trading parameters and the trader's trading plan, the trading system may have its own criteria to initiate a transaction. Once this happens, the software determines the optimal entry level and position size.
Once the forex robot determines the entry level, it will typically initiate a buy order, which causes the trader to open a long position on the AUD/USD exchange rate at the optimal price level, either by market or using a pending order.
The software automatically determines the level at which a stop loss order should be placed to limit the loss on the trade in case the market begins to move in the opposite direction.
In the example above, the stop loss order will be opened at the risk tolerance level, which is usually determined by the trader.
How effective are robots?
Even though forex trading software manufacturers often promise big profits, most of these software packages are pure scams.
Although trading robots are often advertised with claims and reviews from many people, many of these reviews may be false. That being said, many investors and traders have lost money using these trading robots.
Even though a trading robot can scan a lot of charts and information, the software will often respond to incorrect information or false price spikes that a real trader would likely filter out. Although a robot can perform many complex tasks, the software is still not capable of creative thinking or common sense. The software is currently limited to opening trades based on past performance and current programmed parameters.
In addition to the previously described limitations, a typical forex trading system does not take into account fundamental or intermarket analysis. And this can result in a trader potentially losing significant amounts of money in the event of an extreme geopolitical or economic event. However, an experienced trader can use an automated system to evaluate the technical parameters of a trade and base some of their positions on the signals generated.
The movement of markets reflects human mass psychology. If making profitable trades was as simple as buying a trading system and letting it trade, then everyone would be sitting at home with their trading robots. Even professionals who use complex algorithms with much more sophisticated computers to trade do not discount the human element and monitor their automated trading programs very carefully.
While these automated trading programs can be somewhat lucrative at times, in the long run, the only people who consistently make money from automated forex trading software are the developers themselves. Additionally, many of these programs scalp the market, which means they take small profits and set wide stop losses, which can be disastrous for a trading account during a series of losing trades.
Forex market conditions are constantly changing, and a program cannot take into account all the factors that influence the direction of an exchange rate, no matter how many technical indicators it may monitor.
While many people want to make money by trading without much effort, investing in a forex trading robot can be beneficial to the trader in the sense that it can give the trader additional insight into the market. However, believing that it can be a stand-alone trading unit that you can simply set and forget while it generates profits is a naive pipe dream.
Let's sum it up
To become a successful trader, you need much more than just installing MetaTrader, opening and funding an account with a Forex broker, and purchasing a trading advisor.
Instead of risking money by purchasing a trading robot, it is usually much more profitable for a novice trader to invest in a deeper study of the Forex market. Things like studying technical and fundamental analysis, developing your trading plan and trading on a demo account will be the most optimal way to trade at the initial stage.
You are unlikely to hear about a millionaire trader who made money using an algorithmic trading system. Here, the biggest profits are made by software developers who sell their systems and play on the greed and laziness of the general public. If their systems were truly superior, they would not sell them, but rather use them for themselves to extract millions from the market.
