Top 5 tips for improving your automated FX trading
Here at Tradeworks, we love automated trading. As we
discuss below, it offers a whole range of benefits
that can help traders profit from the markets. But
automating your strategy doesn’t guarantee results.
Just like any other form of trading, you need to
dedicate time and effort to get it right. So we’ve
come up with a few tips that we believe will help
increase your chances of success.
1) Keep it simple to begin with
Don’t try to be too ambitious when you automate your trading for the first time. Build a fairly simple strategy to start with which incorporates a limited number of indicators and rules. This will give you a chance to familiarise yourself with your fx trade automation tool of choice and the processes involved in building and deploying your strategy. Once you feel comfortable with the tool, then you can move on to building more complex strategies.
2) Formulate your strategy
Taking a methodical approach to building a strategy will enhance your chances of success. The first stage involves designing your strategy. Every rule must be defined, from which pairs you will be trading on which timeframe to the finer details such as entry and exit criteria. You will also need to determine the parameters for any indicators that you want to incorporate, for example selecting a number of periods for a moving average. In the second stage, you should write out your strategy in the form of a trading plan. Using this plan as a reference will make the process of building your strategy much quicker. Don’t even consider launching your automation tool until these first two stages are complete.
3) Test your strategy
Before you automate your strategy, you need to make sure the underlying assumptions are sound. They provide your trading ‘edge’ after all. The best way to test it is by manually executing a few trades. Once you are confident that the strategy works, then you can automate it. However we recommend testing the automated version on a demo account too before you move on to a live account.
4) Plan for how you strategy will deal with news announcements
When you automate a strategy, you need to allow for the impact that fundamentals can have on a trade (especially those trading on a shorter timeframe). News items such as the non-farm payrolls can lead to increased volatility in the immediate aftermath of an announcement. If the number is higher or lower than expected, there can be large swings in price. You may want to programme the strategy to avoid opening any new positions straight after an announcement. Or you may want to protect open profits by setting up the strategy to close any profitable positions before an announcement is released.
5) Monitor performance
You need to constantly monitor your strategy’s performance to make sure it is working as intended. If not, you need to work out why and tweak the settings accordingly. It may be opening too many trades, in which case you will need to review the entry criteria. You also need to monitor the performance against your risk parameters. If your strategy is going through a period of losing trades, you may want to suspend it temporarily before it hits your maximum drawdown threshold.
If you have been struggling with your automated forex trading, hopefully a few of these tips will help identify where you are going wrong and how you can improve performance in the future. And if you are unhappy with your current FX trade automation tool, you may want to check out Tradeworks' solution. You can build and deploy a strategy within minutes and editing is quick and easy (even after it has been deployed). Go to our website to read more about our tools.
Posted by Thomas Nyegaard
Ex-investment banker now working full-time as angel investor and entrepreneur. Now dedicating all my time to Magick, a new start-up that develops financial trading software designed for retail forex traders. This is a project that fits me perfectly as it combines my extensive financial markets experience with my passion for investing in start-ups and helping these mature into real businesses.Facebook LinkedIn Twitter Google+