If you trade Forex, you will know that timing is critical. A Forex robot can take the guesswork out of flaws in human timing, including emotion, by not only identifying trades but if you choose to do so the robot also automatically enters and exits trades with no manual intervention.
Trading Forex can be very exciting and profitable, but remember, it is a zero-sum game. For every FX winner, there is a loser on the other side of the trade. To be a winner, you only need to be right a little more than half the time.
As part of your broader trading system, can you expect to be a winner more than half the time with a Forex robot?
To help answer this question, it is crucial to undertake rigorous research before adding a Forex robot, also known as an Expert Advisor (EA) to be part of your trading system.
Once you have identified an EA to match your strategy, it is then vital to both backtest and undertake at least 50 trades with it to understand the statistical expectancy by forward testing in a demo environment before progressing the robot to real account trading.
Research is Key
As part of your Forex robot research, it is essential to consider the following points when considering adding a robot to your existing trading strategy.
Compatibility
Does the Expert Advisor’s underlying trading strategy align with your trading strategy?
For example:
- Does it trade the currency pair or pairs that you already trade?
- Are you a day trader using a scalping strategy?
- Do you trade a particular session? If so, does a robot also generate trade signals during that session?
The Key Metrics for Evaluating Robots
To verify robot performance as part of your research, the robot developer must have verified performance data on a real trading account for you to analyze. Two essential resources provide this data, MyFXbook and FX Blue. Consider the following statistics as part of your research:
Profit factor
The profit factor can reveal whether a Forex robot makes money, and so is a crucial metric. The profit factor or PF displays the relationship between profit and risk, calculated by dividing gross profit by the gross loss on all trades. An EA with a PF of less than 1.0 should not be considered for selection as it will lose you money.
Risk-reward ratio
The risk-reward ratio is an indication of a Forex robot’s level of risk. A high risk-reward ratio indicates that a robot has a riskier strategy coded into its algorithm and should be openly questioned.
The golden risk-reward level of 3:1 is considered the benchmark to apply to a trading system where every $1 risked expects to see $3. It means that you could trade profitably with a robot that is only correct 50% of the time. Consider the below table that illustrates this point where if you only had winning trades 50% of the time you would still make an overall profit over 5 trades of $20,000 using a 3:1 risk-reward ratio.
| Trade | Loss | Win |
|---|---|---|
| 1 | $2,000 | $6,000 |
| 2 | $2,000 | $6,000 |
| 3 | $2,000 | $6,000 |
| 4 | $2,000 | $6,000 |
| 5 | $2,000 | $6,000 |
| Total | $10,000 | $30,000 |
Drawdown
Drawdown is an essential metric and represents the maximum loss percentage since the last high point on your capital trading account. It can be analyzed by studying an equity curve chart. If a chart has large peaks and troughs, it is an indication of volatility. A Forex robot with a high drawdown is not only volatile but also poses a higher risk. Consider robots with a low drawdown like Forex Flex EA represented by a steadily rising chart.
Maximum drawdown
This metric represents the robot’s maximum loss after the last high point in capital on your trading account. For example, a 60% drawdown indicates that an EA lost 60% of the trading capital value at one point. If it were to occur right after trading started, it would mean an instant fall of 50% in your capital account!
Average drawdown
Average drawdown is the comparison of several different drawdown amounts. If a robot has five drawdowns, adding them up and dividing by five gives the average drawdown. It will offer you an idea of the average loss size during a period of drawdown.
Backtesting is Vital to Verify a Forex Robot’s Results
Some Forex robots are programmed to be quite active and will put on trades several times a day. Others will trade less frequently, only when conditions are optimal. Some automated programs, such as Forex Diamond have a lengthy history of positive reviews, including our own, and long-term backtesting to confirm their validity – You can also look at the results obtained from recent live trades for confirmation on MyFXBook.
Best of all, you can link them to the MetaTrader demo account without risking real money. It should provide the necessary validation. If you are a new or a seasoned trader, a robot can help you become more profitable as part of a robust Forex strategy.
Statistical expectancy
It is essential to completely disconnect from whether your next trade placement makes a profit or a loss. If your underlying strategy has an edge, you do not have to be right even half the time to trade profitably. Statistical expectancy allows you to evaluate your trading system’s performance objectively by testing robot performance from fifty trades.
Forex robots allow 24/5 trading
There is a vast choice of automated trading software that allows robots to direct your trading through algorithms. Most are simple to install and get running, linking right into your online broker’s platform.
If your broker uses the MetaTrader platform, then automated software integration should be straightforward as most robot developers use the MQL language code of MetaTrader for scripting Forex robots.
Conclusion
Forex trading can be profitable and exciting. By undertaking extensive research and testing to get the right Forex robot trading for you, further reinforcing trade signals aligned to your strategy means guesswork is further reduced. The risk of trading outside the confines of your strategy through psychology also reduces.
For every side that there is a winner, there is also a loser. Which side would you prefer to be?
Written by Chris Gillie
Chris Gillie is the founder of Axcess FX, a Forex software review and research website. He is a former investment banker who worked in FX Sales on the UBS London trading floor. Chris has been using Forex trading software as part of his trading set-up since the late 2000s and the embryonic days of MetaTrader and the MQL coding language.
