Sunday, February 28, 2010

Automated trading, does it really work?

This post is a follow up on Feb 8th post Testing out different automatic Forex trading systems. For those who haven't seen it, it's recommended to read it first before moving on to this post.
I was going to start this one off with 'The results are in!'
But while researching the different trading systems I found out that there seem to be endless combination possibilities utilizing the systems and take forever to report, so I decided to not keep you waiting any longer.
I've been trying several trading systems over the past few weeks and experimenting with which one gets me the highest return. As you probably read in my previous post I was very skeptical about trading systems and found all just a hoax, people selling the systems would probably make more money then you and me.
So the answer to this question is clear, and what you've been waiting for for weeks;
yes sometimes (yes! it will work...sometimes), no and it depends. :P

The answer that I found whether trading systems work for me I can confidently reply with a solid no.
For me that means maybe I haven't found a great system yet, and I highly doubt that anyone has (also referred to by many as the 'holy grail', a trading system that is 100% correct every time) but I will continue to perfect mine and look out for others.

But there is a big 'however' involved answering this question that probably many traders have and are curious about.
I found out during my research that using automated trading in combination with manual trading can lead to more accurate trading and higher returns!
While I had my trading system running in the background of my trading platform (the trading system I'm currently using is allowing you to switch between manual and automatic trading, meaning manual mode will still alert you whether the system 'thinks' it's a good moment for you to buy or sell but will not automatically enter the trade) will give you some vital information on a technical basis.
If you let the trading system run its course you probably will end up with a loss (like me, thank goodness for demo accounts). But if you monitor the trades manually with the system running in the background you can improve your trading skills, yes improve!

So far I'm much more accurate with the help of my little robot by my side. In fact, I don't think I will trade without the little guy anymore! (well it's not really a robot, more a system, but you get the point :).
The systems I tried out, allowed you to plug in your own technical trading plan or from others. I found numerous websites and forums where people could download a little file and open it in their trading platform and let it run on their systems. Some are indeed better then others but as you can imagine, none of them are 100% accurate.
Whether a trading system 'works' or not also depends which markets you are trading on what time. Sometimes the trading system can indeed be very accurate until the markets starts to move sideways.
It changed my trading style around a little bit. Now I use a mixture between automated and manual trading. However I never let the robot do the trades for me, I want to keep control of which trades I do. I feel more confident to enter a trade because automatically I can see right away what is going on in the markets, if I'm currently in a bull or a bear market with my specified time frame, and if the price I see is a good or a bad one. When the system alerts me on a trade I can decide whether I want to enter it or not. And while I'm in a trade and I'm not sure when I should exit for maximum profitability I can see what according to my trading plan would be the best price to exit.

This is my screen at the moment;



As you can see (click on the chart for a bigger version) I like to monitor 2 currency pairs at once, most likely on the 5 min chart. One always be the EUR/USD and the other one is a pair that I find relevant for the day or hour, in this case the USD/JPY. But that's not the point. On the two charts you see blue and red balls (ok you can stop laughing now), blue indicating a BUY and red a SELL. The system automatically detects buy and sell alerts at the same time and will execute them in order, so when you start with a buy, it will buy then sell, then buy again. If you start with a sell, it will sell, then buy again, simple right? On the EUR/USD screen (left) I would have made a nice profit in the beginning but if I would've let the system run its course, look what happens after that, the market is trading sideways so it is buying and selling galore costing me a lot of spread fees (the main reason Forex brokers love trading systems). The trick is monitor the system and enter the trade with common sense and judgement. I think it's a great addon to your trading strategy, after all the trading system you are running has your own trading plan setup attached to it.
My recommendation is to try it. It can't hurt, you will be still in control of your trades, it just a little system by your side making entry and exit suggestions. If any, try a demo account. I found it very helpful and will continue to use it, as said before, I'm more accurate then before.
http://www.vdmtrading.com/2010/02/testing-out-different-automatic-forex-trading-systems/

Disclaimer:

All opinions expressed, trade recommendations/advice on this website are solely of John van der Munnik and are not affiliated with any investment firm or any other organization. You should not make an investment only based using this website VDM Trading for your trading needs without seeking help from your own financial advisor.