What is a Forex Trading Robot and How Does it Work

Forex robots mimic the algorithmic trading software of institutional traders. These forex bots have evolved because manual systems do not efficiently handle certain trading functions. Thanks to the advent of Artificial Intelligence, automated trading systems have become a viable alternative and are quickly becoming more advanced and efficient.

This article aims to delve into the world of forex robots and help the user understand what goes into the design and development of the best forex trading robots.

What is a Forex Trading Robot?

A forex robot is a computer-based software that communicates the trader’s orders to buy or sell to a broker and the orders to exit those trades to the broker’s server.,

So, a forex robot or a forex trading bot is computer software that trades currencies or CFD assets for the forex trader in an automated fashion. For this piece, “forex robots” and “expert advisors” mean the same thing and may be used interchangeably. 

Some may also use “algorithmic software” to describe automated trading software, but they are generally called “forex robots.” 

It doesn’t matter much what you call it; forex robot, forex bot, trading bot, expert advisor, or algorithmic software. What matters that this tool autonomously analyzes, enters, and manages trades on behalf of the trader according to a set of instructions.

Forex robots generate buy and sell signals after analyzing the market. The orders are executed automatically on the trading terminal after connecting with the forex broker’s servers. As part of its function, a forex robot must create an entry price, position size, and exit price. 

Forex robots became popular as it became more apparent over time that much of the trading process’s functionality is hampered by human beings’ composition. Sometimes, traders second-guess themselves and enter too late or too early in a trade. Emotions come into play, and there is also the risk management component that many traders, even advanced traders, need help calculating or adhering to. It is for these reasons that forex robots came into the market.

In summary, forex robots have some merits that put them over manual trading:

• There are no emotions involved, just a set of parameters executed to automate trading strategies.
• Forex robots can operate day and night without getting tired, especially when hooked up to Forex VPS services. 
• Some tweaks of their code can improve them, unlike humans, who probably need to unlearn some stuff and then get retrained to improve. 
• They can be used to trade an account and as tools to attract extra money (more on this below). 

How Do Forex Trading Robots Work in Trading Currencies?

Generally speaking, there are two methods by which forex robots are used to trade currencies. The first method is a speed-based model known as high-frequency trading.

1. High Frequency Trading

Institutional traders usually deploy this forex algorithmic trading method because they have the resources to reduce latency in the trade process. Latency is the time lag for orders to be transmitted from the trading station to the broker’s servers and back to the trading station as an execution.

This algorithmic trading method capitalizes on latency to get into the market ahead of others and offload the positions on other participants who will be coming in, usually for a profit that comes from the price differential that the speed advantage has produced. 

Conversely, retail traders lack the resources to reduce latency. This group of traders will have to rely on the second method of robot trading, which is the low-frequency method.

2. Low Frequency Trading

Here, the trader relies on the trading system and not on the latency-reducing resources. For low-frequency trading forex robots, trading systems rely on different models for their operation.

Forex robot trading can be based on news trading (i.e., fundamentals and macroeconomic news), technical analysis, statistical models, or other microstructural indices, such as price arbitrage and order book information. 

How Do Forex Robot Models Work in Retail Trading?

Here’s some more detail about how the low-frequency Forex robot model works.

1. Market fundamentals/macroeconomic news

Forex robots based on macroeconomic news are rare and harder to build. This is because macroeconomic news is dynamic and impacts the forex market in different ways. For example, a news release could have a low market impact in one year and become a high-impact news piece the following year.

For instance, inflation is the hottest macroeconomic news affecting the market at the time of writing. It did not have this level of market impact three years before.

If you use a forex trading bot to trade this metric, results will vary according to the variation in market impact. This is why macroeconomic news-based robots don’t usually make the best forex trading robots. 

2. Technical analysis

Technical analysis studies the price action on the charts to determine if patterns that repeat themselves emerge. One of the premises of technical analysis is that history repeats itself.

In other words, a specific price formation on the chart that produces a particular result is likely to produce the same result the next time it appears. The repetitive nature of such formations allows forex robots to be programmed according to the set parameters guiding the formation of these price patterns.

The robot is coded to recognize this pattern and trade along the desired result. Sometimes, indicator settings are added to the mix to improve the analysis and outcome of such trades. 

The most common way of building EAs for the retail forex market is to use technical analysis and indicators to create trading forex robots. In fact, most algorithmic trading strategies are based on this.

Here is a much-simplified piece of code that asks a Forex trading robot to enter a trade using a moving average cross. This method describes parameters for the Forex robot to either fulfill a trade entry or abandon it.

if (!CanProcess(bar) || prevBar == bar)

    return;

if (_shortSMA[prevBar - 1] > longSma[prevBar -1] && shortSma[prevBar} <= _longSma[prevBar])

    //cross down

    OpenPosition(OrderDirections.Sell);

if (_shortSMA[prevBar - 1] < longSma[prevBar -1] && shortSma[prevBar} => _longSma[prevBar])

    //cross up

    OpenPosition(OrderDirections.Buy);

3. Market Microstructure

The microstructure of the markets offers a microscopic look at how forex market trades are made and how the trade order process works across exchanges. The markets are a zero-sum environment. For every buy, there must be a corresponding seller. And for every seller, there has to be a buyer.

Since the global market has no centralized location and no single buyer or seller, there will be minute differences in pricing between assets. There are intermediaries, dealing desk operators, and other more prominent players to whom the smaller brokers and intermediaries transfer risks.

Typically, dealing desks will either fulfill orders or pass them on if they constitute a risk. Asset prices can be formed in various ways. There are transaction costs. Trade orders are handled differently according to the method of order transmission (dealing desk, straight-through processing, etc.). All these create avenues for pricing loopholes at micro levels. Such loopholes are small and don’t last long, so they cannot be exploited using manual systems.

Such loopholes as price differentials between exchanges or delays in price data transmission between platforms can only be exploited using automated trading software such as trading forex robots.

4. Statistical Models

Statistical methods are not very popular with retail traders but are widely used in institutional trading. Statistical/mathematical models describe, infer, and predict the probabilities of specific outcomes playing out in the market. They deploy various methods, including market correlation.

What are the Pros and Cons of Using a Free Forex Trading Robot?

Using a free forex trading robot has its pros and cons. The main question to be answered is: Why would anyone give away free forex robots if some amount of work has gone into them? Free forex trading bots are a feature of value-added services in the FX market that focus on signal provision or copy trading.

Usually, the trader is offered the chance to have forex bot trading signals delivered in exchange for some form of value from the trader’s end, such as opening an account with a particular forex broker or signing up for a monthly subscription with a forex signals service provider. These are the only conditions that provide free access to robots that deliver automated forex trades. 

So, what are the merits and drawbacks of using free forex robots?

Pros

• There is no cost to the trader in terms of EA development. 
• The outstanding ones can deliver copy trade signals on their promised potential. 

Cons

• Have you ever heard the saying, “You get what you pay for?” Sadly, this is true when it comes to free trading bots, as most of them do not last. 
• A “free” forex robot may not be really free. You may be paying more down the road for continuous usage in terms of other costs associated with a value-added service. 

How Do You Earn Money From Forex Trading Signals Using a Forex Robot?

Earning money from forex trading signals using a free forex robot is a four-step process:

1. Design, test, and debug the Forex robot
2. Generate some profitable trading history with the robot, preferably over 6 months. 
3. List the expert advisor on a copy trade platform or advertise it online as a standalone product.
4. Generate leads and convert them to subscribers who pay money to use your product periodically.

One advantage of using a free forex robot is that it can serve as a good marketing tool for providers of forex signals or copy trading services. This is especially true if you develop such a trading bot.

Suppose you can develop a trading forex robot that is market-prudent, based on proven statistical models, and profitable over time. In that case, you can use it to attract other traders to subscribe to your service. 

The hardest part of the process is to develop a good Forex robot. This robot must:

• Be market-prudent (i.e., it must have a sound basis in the macroeconomic fundamentals of the currency pair to be traded). In other words, the robot’s analytical build must match the news. 
• Pass various strategy tests that align with proven statistical models. This handles, among other things, the risk management aspect of the Forex robot’s performance. 
• Be built with software and hardware tools accessible to every retail trader. This is where the Metaquotes Language (MQL) coding environment for the MT4 and MT5 trading software comes in.

When such a forex trading robot has been built, it can then be deployed to achieve profitable trading results over a reasonably lengthy period. This shows resilience and evergreen good performance that lasts the test of time. Next, it can be used to attract paying subscribers as part of a copy trade service. The beauty of such robots is that they can be hosted on Forex VPS services to ensure round-the-clock performance, even when the master or slave computers are not on. 

Is the Robot Good for Trading in Forex?

A forex robot is good for trading forex as it eliminates the emotional pitfalls that lead forex traders to make bad decisions and the trading mistakes that end up as losses. A forex robot also allows for a repetitive pattern of profitable trading to be replicated time and again. Forex robot trading also comes with the added advantage of being deployed 24/7 over a Forex VPS network. 

What is the Best Trading Robot for Forex?

The best trading robot for trading currency pairs in the forex market must be market prudent, based on a sound statistical model, and utilize tools that are available to the retail trader. A more detailed discussion on the best trading robot for forex is found here. 

How Much is a Forex Trading Robot?

The cost of automated forex trading robots differs from one provider to another. Some are given free as part of a copy trade service subscription, while some could cost anywhere from a few hundred to thousands of dollars. 

How Do I Get a Forex Robot?

You can have a Forex bot designed for you by a programmer using the MQL4 (MT4) or C# (MT5) programming languages. Alternatively, you can buy any of the commercially available best forex trading bots displayed on a few respectable websites. However, the first option is preferred as you will be in control of the code, and the programmer can translate your ideas into a working product.

Conclusion

Forex robots are automated software used to trade the forex market. The term “forex robots” may also include the high-frequency trading software used by institutional firms. However, while the institutions use their algorithmic software for high-speed trading, the forex robots used by retail traders are based on trading strategy and risk management parameters. 

The development of forex robots is based on several models. Regardless of the model, the structure of the Forex robot is the same: it uses coding information that taps into the tools, accurate data sources, and a theory of design.