Probably about as close to an automatic money making machine as you’re going to get, automated trading software is designed to track financial markets, looking for patterns, and then make trades in order to make a profit. They are most commonly known as EAs or expert advisors, and are written in MQL, for the extremely popular MetaTrader platforms. Some of them are incredibly successful, making an enormous profit.
What these programmes do is watch price movements, wait for signals, and then act on them quicker and more accurately than a person can. Of course, there’s no intelligence as such, all these scripts can do is wait for predefined rules to happen. In theory, they are only as effective as the person who wrote the parameters, and decided that a certain chart movement meant something.
They can be extremely complex, and can deal with any data that the trading software supplies. It is up to the developer to decide how many parameters that they put in.
The most common application for EAs is in forex. This is the foreign exchange market, where people buy and sell currency when they think it is going to increase or decrease in value against another one. As a very basic example, the trading robot might have a set rule, whereby if the average price of the pound against the dollar over the last 100 days moves higher than the price over the last 200 days, it buys a certain amount of pounds, predicting that the price will increase.
Estimates suggest that around 70% of the stocks traded on the New York Stock Exchange are actually done by an automated piece of software.
The main issue with these trading robots is that they can’t act on anything that they don’t understand or know about, just like any other computer or algorithm. A real trader might know of a piece of news that conflicts with a price pattern, but the EA can’t take this into consideration. For this reason, they do need to be monitored to some extent. Some might argue that mechanical forex trading would be a better term than automatic, because while you can leave a script running, without any human input, it’s not advised.
Each year, the MQL developers gather for the Automated Trading Championships, in which competitors from all over the world enter their EAs to try and make the most virtual profit over three months. They start with $10,000 and have to run for the whole time without any user input. The very best ones will come out with more than ten times their starting money. What’s really interesting is that a lot of the entrants began as programmers and developers, not financial traders. They do not make their money from trading, but by selling the EA on to investors.
You can see what automated trading is like by downloading the Systematic demo, an automated trading platform. Of course, you’ll need to know a little bit more about forex first.