More and more traders, institutional and retail alike, are trading short-term algorithmic strategies. These strategies often rely on speedy execution. Strategies also can be enhanced with dynamic allocation and risk management models that model well but depend on constant monitoring if executed manually. While every strategy does not need to rely on complete automation, the more processes that can be automated, the more time you will have to look for other opportunities. This is particularly true with forex trading.
Forex traders face a plethora of problems when developing and implementing any forex trading system. The difference between an amateur and a professional trader is having a robust trading plan, commonly known as a trading system. The system doesn’t necessarily have to be automated, all “system” means is a set of rules that traders follow. Without rules, traders are destined for failure as they become emotional, hungry, sleepy, and greedy.
The great metaphor for trading is war. Trading is a form of economic warfare where the winners go home with resources and the losers are economically killed and left with no resources. Traders should read “The Art of War” by Sun Tzu for more detail about military strategy.
The military, like it or not, is the most robust and sophisticated organization in the world. The military deals with complex political and logistics issues, such as moving 100,000 soldiers to a foreign country, all of whom have human needs such as eating, washing, communicating, relaxing, etc. Military computer systems need to function under heavy fire, in rugged terrain, and under stressful conditions. Military planners plan for many possible scenarios and create documentation in the form of manuals that soldiers read and follow. The reason for this is simple and functional: qualified analysts and policy makers shape plans that are executed on a tactical level. Soldiers should not think about what they are doing, and neither should traders. Planning and analysis can take weeks or months, in the quiet peace of contemplation, not while a trader has positions going against him. A trading plan is equivalent to an automated trade system; quantitative trading systems are simply the automatic execution of a well- planned trading plan, commonly referred to as a trading strategy.
Whether or not a trading strategy is fully automated is not important. What is important is that it is robust, considers many possible scenarios, is tested in real market conditions and can be executed as planned for. Traders need to equip themselves with all the tools to succeed. Some strategies need to be automated, at least partially, to be executed consistently.
Similar to military instruction manuals, a trading plan should be described so that any trader should be able to follow it, not just the plan’s author. The ultimate trading strategy is a fully automated trading strategy. In the end of this article, we provide a fully automated “expert advisor” trading strategy for download and use on the Meta Trader 4 platform. This strategy is a shell, or template system, that can be modified or used in multiple setups.
FOREX DAY-TRADING SYSTEMS
Traders must distinguish between types of systems. A system is a set of rules that can be executed by an automated algorithmic trade robot, or it can be executed by a human. A discretionary system, where a trader takes a fundamental position on the market, can also be executed by an automated algorithm. In fact, some of the best systems are a mix of discretionary and systematic. There isn’t any intelligent trading system that is publicly known, so any automated system requires correct execution by the trader and an understanding of the markets.
HOW TO CREATE A SYSTEM
First, you must find rules you want to follow. The rules must be based on quantifiable variables, not necessarily based on the charts. For example, if the EUR/USD increases by 1% (roughly 100 pips), then buy with a 0.25% stop and a 2% profit target. Any entry order should have an exit rule attached to it. A system should be comprised of several components:
• Indicator or suite of indicators that will determine buy/sell levels
• Exit strategy and trade management strategy
• Risk management that both manages the individual risk of each trade and the overall risk of the account.
A forex system does not necessarily have to be fully automated. It can be mixed or utilize discretionary input. Some systems take support and resistance levels from published sources and use this for entry and exit points. In other cases, traders may take a position that EUR/USD is declining, and load a system that will sell the EUR/USD dynamically by entering and exiting multiple orders based on a complex order entry algorithm.