July 26, 2022

Forex Trading Bots – Pros & Cons Explained

A forex trading bot is an automated trading software designed for performing trading tasks according to a set of rules. Also known as expert advisors (EAs), bots analyze the market data and backtest through specialized algorithms to identify trade opportunities. Moreover, forex bots vary in functionality, as some only provide trading signals (semi-automated) while others automatically execute and manage traders (fully-automated).

Let’s take a look at some potential benefits and disadvantages of trading bot systems to help you comprehend the overall scenario.

Advantages of forex trading bots

24/7 working: Unlike human traders, forex bots can function 24 hours a day without any break. Bots can always examine the market, resulting in no missed trade entries.

Suitable for complex strategies: As bots are automated systems, they are significantly efficient in implementing complex trading strategies. They can manage tasks and reach trading decisions by approaching a multitude of data.

Faster and simple backtesting: Backtesting means analyzing past market data to establish the effectiveness of a trading strategy. Manual backtesting is a remarkably tough, time-consuming, and error-prone task. However, bots shine in this domain as they can quickly backtest a large amount of historical data with their automation software.

No involvement of emotions: Human traders mostly feel different emotions and biases during trading. As forex trading is often used for speculation, it tends to generate diverse mental states among traders, which can lead to disastrous outcomes.

Trading bots, in contrast, can take out the emotional factor from the equation to minimize market risks. They work according to their defined settings and fixed rules under all conditions, delivering stable results.

 

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Drawbacks of using trading bots

Data mining bias: Data mining bias is a process where forex trading bots present “one best backtest” out of hundreds as the most probable result of a strategy. However, in reality, the backtest is not performed thoroughly, which can manifest an inaccurate outcome.

No consideration of fundamental data: As forex robots specialize only in technical analysis, they do not consider the influence of fundamental factors. Any major news or economic event can seriously affect the trading efficacy of a bot.

Mostly non-reliable outside of trending markets: Most trading bots are vulnerable to choppy and non-trending markets. Because they are designed to operate in trending markets, their performance may be affected by directionless price movements.

Some points to remember when using forex bots

  • Although many ready-to-purchase robots are available, you should conduct thorough research when choosing a system as this market is rife with scams and sub-standard bots.
  • Further, try going for a “free trial” first to check whether the system matches your trading temperament and profit goals.
  • Moreover, bots are not guaranteed money-making machines as even the best systems can fail to deliver positive results. Forex trading bots always require a degree of manual effort and regular human input to perpetuate optimal results.

About the author 

Peter Hatch

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