The Fundamental Principles of Forex Auto Trading

By: Hillel Fuld

With the growing popularity of Forex trading, a new trend of forex Auto traders is gaining momentum. There are many individuals, especially in today's shaky economy, who are looking to the Forex market for a safe investment. The problem with a lot of these people is that they have no experience in trading Forex, nor are they interested in spending days and weeks studying it. As a result, they turn to Forex auto trading systems.

A lot of these auto traders turn out to be a scam, but there are some that are very legitimate and can make a beginner trader some very serious money. We decided to review the AvaFX Auto Trader and see if it really delivers positive trading results. In this article, we will describe the process of registering for Ava FX Auto Traders, as well as some very important initial tips on how to get the most out of auto traders in general. You can also read our full review of AvaFX Auto Trader.

We are not going to tell you which trading strategy to choose but all of the information in this post as well as the following articles is based on our choice of trading with a “solid” trading strategy and taking minimal risks. The first thing you need to do before trading with an auto trader is decide what kind of trader you are. In fact, this is something you should do even if you are trading Forex the “old fashioned” way. Are you a trader who is willing to take risks with the chance of making a huge profit in one position? Alternatively, are you interested in making smaller profits while taking much smaller risks? These are some questions you need to ask yourself before even opening up an auto trading system. Every decision you are going to make from here on in will be based on this initial decision.

After you determined who you are as a trader, there are two very crucial points you need to understand before trading. The first point is that Auto Traders are composed of what is known as systems. These systems are programmed and distributed by individuals. They are for all intents and purposes the same thing as strategies. You need to decide based on your initial decision of what kind of trader you are, what kind of strategy you would like to accompany your trades. For example, in our case, we decided to trade with a “Solid” technique, so we were looking to make smaller profits while taking minimal risks. In our case therefore, we defined that our system would be one that has not lost more than a certain number of pips in one trade. It would have to display a graph that when looking at its progress over a defined period of time is moving upwards in a stable manner. Again, this is based on your decision of what kind of trader you want to be.

Another important factor you need to understand before auto trading, is that you are not going to be trading Forex, but rather letting the auto trader trade for you. What you need to do is simply apply basic statistics and filter out the systems that do not match your personal trading style. You do not choose pairs when auto trading, you choose systems. Whatever system matches your needs should be selected and a trade opened based on that system. The pair that is supported by the system you chose will be the pair that you trade. You do not choose pairs, you choose systems. This is of course assuming you do not want to choose a system based on its pair, maybe one would do this if they do not have faith in one currency or another.

Once you understood and implemented the above fundamental principles of auto trading, you need to begin the actual process. The first step is choosing your systems. You do this by defining the basic parameters for choosing a system and applying a filter to the entire list of available systems. This should include the system's maximum drawdown in one position, number of months since the system became profitable, and the number of trades with a minimum of 30 (less than 30 is not enough statistical information in order to accurately analyze the information). It is important to remember that these are the basic filters, but to achieve the best results, you should apply the more complex statistical checks as well.

At this point, you need to compare between the results of your previous filter. One of the primary factors by which you should compare is percentage of profitable positions. So, if for example, a certain system has a 30% profit rate, meaning it produces a loss in 70% of its trades, this is generally not a system you want to choose. That is of course unless the other systems have even worse ratios.

Once you determined which one of the systems left in your list has the highest ratio of profitable positions, you should check how many positions this system can open simultaneously. If for example, this system can open 4 positions at the same time, you have four times the exposure of a system that only opens one.

Once you have narrowed down the relevant systems for your trading needs, you need to examine them one by one. The first step is a detailed examination of this system's chart. You can view the direction of the chart in a defined period of time. This is of utmost importance because if you chose to be a “solid” trader like we have, you do not want a system for which the chart displays extreme movements. You want to ensure that the chart is always moving upwards and in small increments.

After you view the system's chart, you could go into the screen displaying detailed information about every position opened using this system. You can see all the details about its past and present transactions. How long were they open, the date on which the position was opened or closed, and other very useful information on how this system trades. Here you will have to apply some common sense based on your personal preferences.

Once you have completed the selection process and have decided on the system that matches your needs, there are two things you need to remember. The first is, just like in regular Forex trading, once you choose a system, stick to it. Do not let emotion take over, let the system do the trading for you. Having said that, define a period of time after which you perform the above filters again. Just because a certain system matched your criteria this week or this month, does not mean it will next month as well. Alternatively, just because a certain system did NOT meet your requirements this time around, does not mean it won’t next time.

Perform this filter once every week or month depending on your own personal configuration. This is the second article in the Auto Trading series. The next article will include concrete examples as well as screen captures of our personal experience with the auto trader we used.