Automated Mechanical Systems

An automated mechanical trading system not only delivers buy/sell signals but also executes the trades on your behalf. If you have a day job, this is an efficiency you will appreciate. Automated systems also overcome the override problem, the most vexing problem in the mechanical system world. You can set up your system to run without you, preventing you from cherry-picking trades, and this saves you from second-guessing the system. You can also require that the system get a personal confirmation from you for every trade before it is placed, but this lets emotion back in, the very thing you are trying to avoid by automation in the first place.

Automated trading systems are also called “algorithmic” trading systems, referring to the fact that they are based on formulas that dictate the buy/sell signals. Some people name automated systems “robots,” “bots,” or “expert advisors.” Obviously, you need a broker platform that accepts automated trading orders. As of 2024, MetaTrader 4 is the predominant program in use, although you need to learn the MetaTrader programming language (MQL).

If you are software-literate, you can build your own automated system. If not, you can hire a programmer to build a system to your specifications or buy software that allows you to build your own automated system. You can also buy an automated system that is already built or download one for free. The virtue of building your own system or having it built is that you can customize it to your heart’s content, including your own personal money management rules.

How Much Should You Pay?

You can find something that bills itself as an automated trading system on eBay for as little as $6. When you look a little closer, you get a single indicator for $6, although it is for MetaTrader 4 software, and reviewers claim to be making money with it. For $10, you can get support and resistance. You can find a “scalping system” for $89. Read the fine print. Ask yourself whether you want a single indicator generator or a more inclusive trading system. A single indicator might not be a bad place to start.

A system that includes more indicators will cost anywhere from $100 to $1,000. If you hire a programmer to build a system for you that meets your specifications, you can pay from as low as $20 to as much as $10,000 or even more.

Advantages

The primary advantage of automated trading systems is that you can set it up so that it runs without you and your emotions. As noted above, you can also set it up so that you can interfere with it, but that defeats the purpose of automation. You will get more consistent results by building the system right and letting it do its job.

As with all trading systems, you need to select indicators and then you need to backtest them on your currency and your timeframe. Forward-testing is good, too, so that you see how your system works in real time. You can do the test yourself or run it on a demo account at your broker. The return of backtesting to the forefront of trading strategy design is a welcome change. For the first decade of retail Forex trading, backtesting had become unpopular as too time-consuming and difficult. Traders placed trades based on eyeballing charts, instinct, and chatter. Now traders are being reminded again that indicators are central to the trading decision and there is no sensible way to choose indicators without backtesting. 

It is debatable whether you will get measurable different results from forward-testing as from backtesting. If you have a sufficient amount of data — instances where your indicators generated buy/sell signals — your indicator should be robust, i.e., valid across varying conditions. It is important not to make your system so fancy and overloaded with conditions that you get hardly any trades.

All of the same issues prevail in automated systems as in manual systems — you need to determine which indicator has priority (i.e., has the highest weight) when there is a signal conflict between indicators, and you need to apply your money management rules so that you do not wake up some morning and find yourself $50,000 in the hole.

An automated system will not overcome a central problem in Forex trading — determining when the market is trending vs. when it is range trading. This is a very difficult determination that statisticians have been laboring for decades to solve. It would be heavenly to use one set of automated trading orders in a trending market and a different set of indicators and trading rules and orders when it is ranging. To date, no automated trading system claims to offer alternative trading modes depending on trending/ranging market conditions.

Another key virtue of automated systems is their speed of execution. Computers do not dither and fret and worry — it is mere seconds from trading decision to trade execution. The computer can also handle more than one idea and one order at a time. Even if you have fast fingers, placing a simple three-part order on five currencies (entry, stop, and target) takes time. The computer can place those 15 components far faster (and accurately) than you can type. Also, the computer is awake at 2:00 at night, and you do not have to stumble out of bed when an alert goes off. This is a tremendous advantage in a 24-hour market. Also, you can have more than one trading system without becoming terminally confused, or you can have separate accounts for each automated trading system.

Disadvantages of Automated Trading Systems

As with all computer and internet-based activities, connectivity issues can disrupt your trading, along with outright electrical power failures. You are no more at a disadvantage than any other trader when these events occur, but it may seem that way. A more pressing problem is slow broker execution, which makes your ideal entry or exit less than ideal. You need all three infrastructure components to be in tip-top shape to engage in automated trading — electrical power, internet, and brokerage capability. More troublesome are errors that arise from glitches in the software itself, such as duplicate orders, failure to apply a stop, and so on. Automation does not remove the responsibility to monitor and review order execution.