Behind the Scenes: How Automated Forex Trading Systems Make You Money

The income and free time you can gain by trading forex are real. However, even experienced forex traders fall into traps that make them lose money. Trading in a ‘mechanical’ way is the goal of every trader, and helps you avoid most or all of the major trading mistakes.

The easiest way to trade mechanically is to use an automated trading system. A good automated system effectively manages trading capital, follows a set of entry and exit rules, and executes the trades flawlessly. Investing in a good automated trading system will put you ahead trading forex providing the time and money to do the things you really want to do.

Protect your trading capital

The number one reason traders lose money is poor money management. Or even worse, some traders use no money management at all! The size of your trades should be an integral part of any good trading system.

Using a fixed percentage to risk on each trade is a simple, well-studied, and very successful money management strategy. Risking 2% of trading capital on a trade is generally accepted trade size. For example, if your trading account is $10,000, your maximum loss on any one trade would be $200. As your capital increases, you would increase the maximum loss on a trade. Assume your trading capital has increased to $15,000. At this point, your maximum loss per trade would be $150. Easy, right?

A trading system should manage the ‘risk percentage’ based on win/loss percentage, the size of the average win compared to the average loss, and other unique system characteristics. There are no hard and fast rules, but generally, you could raise the risk percentage with a higher win/loss percentage and/or a higher average winning trade to average losing trade.

While the system should manage trade size based on its unique trade characteristics, you maximum trade loss should match your personal comfort level. A good system should reduce your stress not increase it.

Follow Trade Entry and Trade Exit Rules

Picture this situation. You just entered a trade based on your entry rules. The trade is profitable, and the market is continuing to move your way. You then get your exit signal. You know you should get out of the trade, but the market looks great. You are sure you could make more money by staying in the position. So, you ignore the exit signal and stay in the trade. All of a sudden, the market turns against you. You try to exit but the liquidity has dried up as other traders pull their orders. By the time you get out of the trade, you made less profit or even worse, lost money on the trade.

The second biggest reason that traders lose money is not following their system’s trading rules. A well designed and tested forex trading system gives you a statistical advantage in the market. However, if you do not follow those rules, you lose the advantage and will ultimately lose money trading. An automated trading system greatly increases your profitably, since the system always follows the programmed trading rules.

Flawless Trade Execution

Automated trading systems will outperform a human every time when it comes to executing trading signals. People are slow. Computers are not. For example, trading systems that make frequent trades and are in the market a short time can have a very high percentage of winning trades. However, those systems must execute trades quickly and flawlessly to achieve their designed profitability. A system like this would only be profitable if you let a computer make the trades.

The example above shows how critical trade execution can be in fast trading system. But, what about a longer-term trend system? Does trade execution really matter all that much? The answer is still yes. Even in a long term system, quick and accurate trade execution will slightly increase the profitability of each trade which compounds over time. That extra little profit really adds up over time.

Trader Flexibility

This may seem trivial, but if you are not using an automated system, you will have to sit in front of your computer all the time to watch for trading signals or trading exits. How fun is that? You are in this for fun too, right? An automated forex system will allow you to step away to get a cup of coffee, answer the door, feed the dog or whatever. Without an automated system, you don’t have that luxury.

Conclusion

Using an automated forex trading system will increase your profitably by steering you away from common trading pitfalls. A good trading system will:

- Manage trade size to increase profitability and minimize risk
- Consistently follow the designed trading rules
- Quickly and accurately execute trades
- Provide some flexibility during trading hours

By using an automated forex trading system, you will make more money, faster trading forex giving you the time and money for the things you really want to do.