Building an Automated Forex Trading Strategy from Scratch
Nowadays, any trader can create a sophisticated automated-trading strategy or else an Expert Advisor (EA). This EA will be able to trade without any human intervention on a platform such as the MetaTrader-4, MetaTrader-5, TradeStation, or NinjaTrader. These are some important facts and tips regarding automated-strategy building.
Introduction to Automated-Strategy Building
What is an Automated-Trading Strategy?
An automated trading strategy is a software code that plugs into a trading platform and allows traders to automatically execute, modify, and close trading orders, based on a set of rules.
There are two general approaches for building an automated-trading strategy:
(i) Model-based approach
(ii) Data-driven approach
The data-driven approach refers to big-data and it requires significant hardware resources. Retail traders should focus entirely on model-based trade strategies, which are easier to implement.
Eight (8) Basic Automated Trading Strategies
These are some popular automated-trading strategies:
(1) Trend-Following Strategies (following strong price trends)
(2) Breakout-Trading Strategies (opening positions when key price breakouts are confirmed)
(3) Volatility-Expansion Strategies (focusing on volatility changes and combines the results with price metrics)
(4) Mean-Reversion Strategies (the price of a financial asset will revert to its mean price 80% of all times)
(5) News-Events Automated Strategies (opening trades based on the difference between actual data and market consensus)
(6) Market Sentiment Automated Strategies
(7) Arbitrage & Statistical Arbitrage Automated Strategies
(8) Mathematical-Model Based Strategies
How Does an Automated Trading Strategy Works?
An automated strategy incorporates several algorithms and two basic mechanisms:
(a) The analysis-mechanism that analyzes financial data 24/5, and creates alerts based mainly on technical analysis.
(b) The execution-mechanism that opens, modifies, and closes trade positions, at any time.
As concerns money management, these strategies may include sophisticated algorithms that can adjust position sizing according to the current market conditions (volatility, spread, etc.).
What are the Advantages when Using an Automated Trading Strategy?
These are some key reasons for the automation of a manual-trading strategy:
(1) Achieving 100% rule-based Forex trading
An automated strategy can continuously monitor the currency market and trade only when specific rules and conditions are met.
(2) Trading 24/5 without physical limitations and emotions
An automated trading strategy is never getting tired and faces no emotional hazards.
(3) Saving precious time for yourself
The implementation of an automated strategy saves precious time as it enables the automation of several key processes such as market analysis, filtering, decision-making, and of course the execution module.
(4) Backtesting any trading idea in a few minutes, with great precision
It is difficult to manually backtest a trading idea, however, you can easily backtest any idea using an automated strategy. This means you can choose the best performing strategy based on accurate performance results and then optimize your strategy to fit any market conditions.
(5) Making money by selling a custom-made automated strategy
Selling a successful trade strategy to other traders is not an easy task as it requires promotion and after-sales support. However, you can offer your Strategy to a marketplace, and outsource promotion and payments.
Creating Trade Setups and determining specific Trading Rules
In order to build a successful trade strategy, you must first create some detailed trade setups. These setups will be the product of hard work and extensive backtesting and include the specific market conditions under which a trade will be executed. These conditions should include all types of markets (ranging, bullish, or bearish markets). These are some common tools for creating setups:
- Fibonacci retracements (for trading market corrections)
- Key support/resistance breakouts
- Order/Volume breakouts
- MACD crossovers
- RSI-based setups
- Intermarket correlations setups
Creating an Efficient Money Management System and Inserting Key Filters
Money management is the most underestimated field of financial trading. The risk-settings of an automated-trading strategy will determine to a high extend its success. The key tools of an efficient MM module include:
- Spread-control filter (to deal with volatile markets)
- Risk/Reward filters (only selecting trades with high R/R)
- Lot sizes and trade leverage (very important)
- Max drawdown filter (limiting the impact of bad days)
- Market gaps filter
- Time filters (avoiding news events, etc.)
- Debug filter (to monitor any errors after the automated-strategy starts to trade)
- Stop-loss orders (to limit the loss potential of any trade)
- Trailing stop orders (to run your profits)
How to Create an Advanced Automated-Trading Strategy without Programming Skills?
For those who plan to apply an automated strategy but lacking programming skills, there are online builders that can transform trading ideas into fully automated trading strategies.
EA Builder for Creating Auto-Trading Systems
The best online tool at this moment is EA Builder that offers a graphical interface to build your strategies and exports fully executable MQL files for MetaTrader4 and MetaTrader-5. Additionally, EA Builder supports the TradeStation platform.
- Completely free for creating indicators, it requires $97 to build an unlimited number of Automated Strategies and export them as MQL files
- There is a full set of functions (even trendlines)
- Full Money-Management function (even time filters)
- 100% Online App (runs on any Windows, MAC, or Linux PC)
The advantages when using EA Builder
- You can use it for free to create fully-executable indicators
- Fully-graphical interface (No need for coding)
- Trade any financial asset in any timeframe (Forex, Crypto, Stocks, Gold, etc.)
- Action alert methods (e-mail, audio alerts, on-screen)
- Supports MT4, MT5, and Tradestation
- The final executable code can be used in an unlimited number of accounts
You can use EA Builder completely for free and later transform your indicators into fully automated trading strategies. The full version costs 97 USD (one-time payment).
Final Words -How to test your Automated Trading Strategy and Make Sure it Works
Once you have finalized your automated strategy and transform it into an executable file (for example MQL4) you can backtest it. The most common way to backtest any automated strategy is by using the strategy tester that is built-in MT4/MT5. After you have optimized your strategy and you are satisfied with the results you can use it on a demo account. Finally, if you are again satisfied with the results you are ready to test it on a live account. Make sure you start with a micro-lot account before moving to a standard-lot live account.
- Backtest and Optimize
- Demo Account
- Micro-lot Account
- Standard-lot Account
□ Creating an Automated Forex Trading Strategy from Scratch
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