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If you are a regular trader and you’ve realized that trading is taking up way too much of your time, you might want to look into automated trading.

For the uninitiated, automated trading involves inputting a set of commands that will automatically execute when certain conditions are met.

You can set your buying price and selling price in advance. When the stock or currency price meets the price you’ve set beforehand, trading software (like MetaTrader) will automatically execute your trade. For the more seasoned traders, you can also base the buying and selling points on conditions like moving averages or convergences. You can even go more complex with algorithmic trading, using complicated algorithms you write yourself to execute trades. This is where trading robots come in, and they can be pretty good at what they do.

The best thing about automated trading is that you don’t have to spend hours upon hours monitoring graphs and charts, waiting for the best time to trade. This is wonderful for forex trading, where the markets are open 24/5.

Additionally, automated trading gives you (or at least, your trading robot) the power to scan millions of different charts at a speed that no human ever could.

There are even features like Fusion+ copy trading, where you can set the program to automatically copy a trader’s actions. If there’s a forex trader you really trust, for example, then you can save yourself the hassle and just set the software to copy all their trades.

Of course, automated trading takes a little learning to get into, which is why we are providing this beginner’s guide to automated trading.

1)     Buy off the shelf to start

There are a number of platforms that offer automated trading software. There’s no need to build a trading robot from scratch, especially if you’re just starting out.

Trading platforms like MetaTrader4 — the most popular forex trading platform — have tools that allow you to get into automated forex trading. You can check out the “Market” tab in your trade terminal section within the platform and have a browse of a wide range of EAs/robots to purchase to get started.

Their platform lets you use trading robots built by others (there are paid and free versions) and if you want to start off with a small amount of capital just to see how it feels, this is the place to do it.

2)     Know the difference between a good robot and a bad robot

As with any software you plan to download and use, you should know if the robot you’re planning to use is a good one. After all, real money is involved here.

In forex trading, where markets run 24/7, you don’t want to waste your money on a trading robot that gives you losses.

First, you can consider the track record of the trading robot. This can be as easy as looking at the robot’s reviews on the website itself or looking it up on forex trading forums where you’re bound to find forex traders who regularly use robots.

Second, just look at the website itself. If it looks unprofessional or promises unrealistic returns, you’ll want to stay away. One of the primary rules in forex trading is that if a deal is too good to be true, it probably is.

Third, look at the price itself. Trading robots are complicated software that took a lot of work to make. You’ll be hard-pressed to find good robots that are cheap or even free. If you see a trading robot that’s a little too cheap for you, keep looking.

Finally, you can find plenty of third-party websites such as Myfxbook.com, Forex Peace Army, or the MetaTrader Market that let you find the most popular robots, reviews from real traders that have used the EAs. We recommend doing a lot of research on the sites above before you dive straight in.

3)     If building your own, know what’s involved.

As we said, trading robots are complicated software that run on immense lines of code. If you want to build your own, you’ll need the necessary coding and programming skills.

It can take months to build a successful trading robot, and it will take a lot of trial and error, along with plenty of frustration.

If you have an idea for what you want but want someone else to build your automated trading robot without getting into too many complications, you can look at possible vendors like TradingCoders or Robotmaker that can build them for you.

Automatic trading robot builders give you a clean interface where you can build and edit your trading robot without learning complicated programming from scratch.

Regardless of how you choose to build your robot, you’ll still need a lot of market and technical analysis skills to succeed, especially if you are entrusting others to build something for you. Study well beforehand and know exactly what you’re getting into.

4)     You’re going to need a virtual private server.

Again, the markets in forex trading are open 24/5. Good trading opportunities come and go in the blink of an eye. The last thing you want to happen is missing a good trade because you suddenly had connectivity issues.

By using a virtual private server like the vendors from Fusion Markets Sponsored VPS (Virtual Private Server), your trading terminal can be connected 24/7 on a virtual machine. You’re basically using a constantly connected server to give you more reliable connectivity so that you are always online and not missing out on trades.

A good VPS will give you not only consistent connectivity but also low latency and fast executions. In forex trading and algorithmic trading, every millisecond counts, so you might as well use the best available tools out there.

Automated trading can be a lot of work at first. Still, it can also be very rewarding once you’ve established your own system. Hopefully, we’ve given you enough information to get you started on your very own automated forex trading journey.

That’s a question that has dogged professional investors for years.

Picking investments or trades to buy is one thing but when it comes to selling and in particular timing a sale its a whole different ball game.

In retail trading circles, this can cause us to snatch at profits and to run losing positions beyond the point where our money management rules tell us we should have closed the trade, with predictable results. It's a clear form of loss aversion (a cognitive bias that we should all be aware of) that stops us from making the rational call to close the trade.

Success in trading comes from running profits and cutting losses to grow our capital base and the ability to do this repeatedly, over as long a period as we can manage.

Having trouble selling isn’t confined to private investors, however. It’s a real issue among professional traders and money managers, unlike the science of buying or investing, which has been scrutinised to death by academics, analysts, traders and other financial markets participants. The science (or should that be the art of selling or divesting) has had precious little coverage in comparison.

The widely respected Barons magazine recently highlighted the asymmetry in professional money managers' selling ability and why professional can vastly underperform the market benchmark.

A research paper written by a mixture of US academics and specialists who measure investment performance or “skill “ as they like to call it, looked at 4 million trades made by money managers between 2000 and 2016 across 800 portfolios that on average contained more than USD 570 million of assets (aka "smart money").

The researchers found clear evidence of skill when entering trades or positions on the money managers' part, but it was a completely different story when it came to exiting trades.

In fact, the research found that the money managers were frankly shockingly poor when it came to timing sales, selecting what to sell and when to sell it. The researchers estimated that this lack of selling ability cost the managers returns of 2% per annum. Whilst that might not sound like much in insolation, if we consider the effects of compounding over decades that underperformance becomes hugely significant.]

That point is further reinforced by research by asset managers at JP Morgan Chase in 2014.

The fund managers looked at the lifecycle of 3000 US stocks dating back to 1980 what they found was striking as the quotes below show.

Risk of permanent impairment

“Using a universe of Russell 3000 companies since 1980, roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value.”

Negative lifetime returns vs the broad market.

“The return on the median stock since its inception vs an investment in the Russell 3000 Index was -54%. Two-thirds of all stocks underperformed the Russell 3000 Index, and for 40% of all stocks, their absolute returns were negative.”

Trades have a finite life cycle, and for the vast majority of stocks (or choose your asset class), they will often have their moment in the sun, get too close to it, and then fall away, never to return to those levels again. Identifying trades at their peak or going past their “sell-by dates" couldn’t be more important to an investment portfolio's performance.

In light of this knowledge, what can we do?

As with all the biases and psychological blackspots in trading that we discuss in our articles knowing and acknowledging that they exist half of the battle because we can modify behaviour accordingly once we have done that.

As traders in cash-settled margin products, we have an advantage over the money managers and asset owners described above. Simply because we are used to going both directions, e.g. shorting, on asset classes such as currencies and metals.

We take a 360 degree or holistic approach to the markets and the skills we use to decide to short USDJPY or the US 500 index can also be used to determine when a long position has run its course. Conversely, the skill set we use to identify a trading opportunity on the long side should also tell us when a short position is running out of steam.

Most traders we know of at Fusion do not hold their trades for more than a couple of days. Due to the power of leverage, they often don't need to since the gains can be enormous (but so can the losses we leave to run far longer than any positive P&L).

At the same time, why not make use of take profits or trailing stops to make sure you can squeeze that little bit extra out of the profit on the trade or set your levels and stick to them, without checking your phone or platform every minute of the day as we all do.

By adapting our mindset and the trading skills that we developed around opening trades, we can become better sellers or closers of positions and that will help us get the most out of the trades we make and the positions we take.

Or why we tend to rely heavily upon the first piece of information we receive.

Our minds can have an enormous impact on our trading and the returns that we generate from it. The way we think, act and behave when we trade or invest is at least as necessary if not more so than our trade selection, particularly in the kind of one-way markets that we have seen post the covid crash.  

A rising tide lifts all ships they say, and, in this case, the rising tide of the markets was provided by the printing presses of the major central banks along with the stimulus packages from national governments.

However, Central banks won't always be there to rescue us and we need to be aware of the kind of tricks that our brains can play on us if we are to avoid making the wrong trading decisions.

One of these tricks has a nautical moniker, anchoring, in which our brain subconsciously latches on to an idea, an assumption or a set of figures and uses that information in decision making, regardless of whether it's accurate or even relevant to the matter at hand.  

What's more, as humans, we tend to carry these impaired decision-making processes forward so that we end up using an inherently flawed system and often without realising it.

Behavioural psychologists have highlighted these tendencies in their experiments.  

In the case of anchoring American academic Professor Jay Edward Russo performed tests on 500 graduate students in which he asked them pairs of questions on history and general knowledge, but, unknown to the students, he had "salted "the questions with erroneous dates and figures.

The student's answers invariably reflected the incorrect numbers, which were varied across different groups of students within the experiment, highlighting a clear bias.

Professor Russo was effectively projecting those values into the student's subconscious, creating an anchor point.

When we become anchored to figures or a plan of action, we filter new information through that framework, which distorts our perception and decision making.  

This can even make us reluctant to change our plan or framework even if the situation calls for it.

There are few consequences if any when this happens in an experiment inside a university psychology department. Still, if it happens in the real world like in trading or investing, then there most certainly can be consequences.

Anchoring Bias has been described as one of the most robust effects in psychology, the fact that our decisions can be swayed by values not even relevant to the task (or trade) at hand.

Let's say we are negotiating the purchase of a house and I tell you it's worth $1,000,000, and I wouldn't sell it for less. You, as the willing buyer might have only had a price of $800,000 in your head. But all of a sudden, you now are anchored on my price. Not yours. The worst part is that the person who goes first in the negotiation tends to anchor the other party (remember this for the next salary negotiation you need to do with your boss!)

The studies even show that if you rolled a pair of two dice, gave the numbers (e.g. 10 and 19) to the study participant, that subconsciously, you would anchor them on these two numbers. Ask them what they would pay for a house, bottle of wine, or in one notorious study, the judges sentencing a criminal, these numbers are in and heavily influencing the participant's decisions whether they like it or not.

Anchoring always occurs in making our trading decisions, especially as it might help to explain our fixation with round numbers. E.g. EURUSD at 1.20. Gold at $2000/ounce. DJ30 - 30,000. Once we get hooked on the number, we always use it as a reference point in future, probably because it "feels right".  

Let's say in the past you might have successfully gone long EURUSD at 1.20 earlier in the year, and now whenever it comes back to that number, you will buy it again (the same thing happened to EURUSD at 1.10). You can't explain it, but you had past success with that number and you will gravitate towards it without understanding why.

Take a moment to consider some key support and resistance levels on your favourite instruments. Are they round numbers too? Why might that be? Could it be because people are anchored at Gold at $1900? And that every man and his dog has placed their buy orders at that level because it's "good value" or has spent time around that level in the past? Remember that the market is driven by sentiment and agreed upon narratives. Think what else could the crowd be anchored on that might be to your advantage knowing what you know now.

How do we avoid being anchored? 

Given that we don't completely understand the processes that cause anchoring to happen in the first place, we are unlikely to avoid it entirely.  

However, by being aware of its existence, we can revisit and retest our assumptions when making important decisions, to ensure that we are acting rationally and basing our decision on the situation at hand, not irrelevant inputs.

Perhaps the best way to avoid anchoring in trading is to treat every trade as an individual event and to judge a trading opportunity on its current merits. By doing this, you have a better chance to ignore any reference or prior interactions you have had with the instrument you are trading. It won't be easy to do at first, but it could prove to be a valuable discipline over time. As mentioned, this is crucial to comprehend for putting your stops and limits around key support and resistance levels.

Think about a time you have been fixated on a number. Was it buying a house? A pair of shoes? Trading? Now think whether that number could have been influenced by someone else, e.g. the seller, the shoe store etc.

Anchoring can certainly also play a part in other hidden biases and behaviours such as loss aversion (e.g. not wanting to close your open losing trade).

The next time that you are about to trade, take time to think about why you are fixated with that number for entering and exiting the trade, and how you reached the decision to pull the trigger. A few moments of reflection might make all the difference.

In trading, as in life, we are faced with the need to assess complex situations and quickly make judgements or decisions. And in both cases, we can’t be certain what the outcome of those snap decisions will be. Though we have to deal with the consequences regardless, even if they don’t reveal themselves for some time.

I wonder how many of us look back at the choices we made and judge them solely by the outcome they achieved, be that good or bad, rather than looking at how we got to that endpoint?

Behavioural psychologists believe that if we look at events purely in terms of their results, we are under the influence of outcome bias and as such we are likely to have a flawed view on risk and reward.

That outlook has been famously summed up in the phrase “picking up dimes in front of a steam roller” which has been variously attributed to Nassim Taleb and or economists Martin Wolf/John Kay.

Whoever coined the term (no pun intended) got it just right, because if you are picking up those coins then yes you are acquiring money, but you can only afford to slip up once and then it will be game over, and in a very messy way.

Another renowned economist, John Maynard Keynes, wrote on the subject of risk-reward and outcomes, just over 100 hundred years ago, in his treatise on probability.

Where Keynes thinking differed from traditional schools of thought was that he believed that an event could be, what he called, objectively probable, even if it didn’t actually take place. And that it would remain so even if you were looking back at events at a future point in time.

For Keynes, it was more important to be rational in your decision making than to be right.

Keynes of course also famously said that “the markets can remain irrational for far longer than you can remain solvent “  

That is one of my favourite quotes on investing. It neatly sums up the practicalities of being rational versus being right, as far as a trader is concerned - Being right doesn’t necessarily make you money and in fact, even if you are right waiting for that to be proven could cost you a fortune.

Whereas being rational or pragmatic, and acknowledging that the market is “directionally right “ but for the wrong reasons (which is usually the sheer weight of money) is one thing. But then trading with the market until the point when the crowd realises their folly, is likely to be a more profitable approach in the long term.

After all, by adopting this approach you don’t have to time the market at all instead you just need to watch for the points at which the crowd turns. And to that, we can use momentum and sentiment indicators, which you can set up in advance.

In short, when it comes to trading at least, the process is more important than the outcome.

The British military has a saying which runs as follows: Failing to prepare is preparing to fail.

As a trader it’s hard to fault the logic in that statement, because if we believe that there is a symmetry between risk and reward, inputs and outputs, effort and results, and in trading where there must be a loser to offset every winner, why wouldn't you believe that?

Then if we don't prepare properly for each trade we make; we are not giving ourselves the best possible chance of making money.

We often say that a systemised approach to trading is the best one to adopt. What we mean is that we should have a framework of rules that we follow in each trade we make.

And we don't let our hearts rule our head or worst of all let our egos’ fools us into thinking that we have some special insight our secret trading sauce. Because in 99.9 times out of a hundred that won't be even remotely true.

Talent and luck will carry you only so far and many a sportsperson has built a successful career by recognising their own abilities and limitations, and then working hard to improve their technique and approach.

And in turn in recognising the weaknesses in their opponents game, which they can then exploit.

The opponents may still score against them but if they are reducing the rate at which they can score then they are doing something right, and they are slanting the odds of a positive outcome in their favour.

In trading, you won't win every contest but if you win more than you lose and have bigger wins and smaller loses, then, over the long term you will definitely come out on top.

A wonderful client of ours named Jimmy from up north in Indonesia wanted to learn a little more information about the sentiment tools that we have on offer.  We love helping traders grow and your feedback so figured it deserved its own post.

Because the sentiment is based on advanced Natural Language Processing (NLP), an advanced form of Artificial Intelligence, we know it might seem daunting to look at on first glance, so hopefully, you find the below Q&A interesting.  

What is the sentiment chart telling me? Is there any significance to the “wave” itself?  

The wave line is the sentiment score. The wave effect was created to show that contrary to prices on the particular asset class, the sentiment is not a precise measure. It is more a proxy than anything else.  
 

What is the sentiment score? How is that calculated?  

The machine learning model creates a sentiment score by scouring all of the words in the sources selected (e.g. nouns, pronouns, adjectives) within the articles it scans each day. In a simplified way, it is the difference of the score of the positive words (e.g. good, very good, great) minus the score of the negative words (e.g. bad, very bad, awful) embedded within the article.  

The calculation is made on a 24h rolling window with a recalculation latency of 15 minutes.  

The usefulness of the current sentiment the score is relatively short term (1-3 weeks).  

What is the subjectivity score? How did it arrive at this number? What happens if it goes higher or lower?  

The subjectivity is calculated on the difference between the factual words and the emotional words embedded within an article. If there are a lot of words that fall into the “fear” lexicon for instance compared to factual observation, then the gauge will be more inclined towards subjectivity or irrationality. At 0% the gauge would tell you there is no irrationality from the crowd and any article published is based on factual elements. If the gauge is above 50% and close to 100%, it means the crowd is a bit irrational about the asset and the price of the asset is not a reflection of its fundamental value. This is a great tool to detect bubbles in asset classes like equities.  

What is the confidence index?  

The confidence index is a relative index. It looks at the history of the volume of news and will scan over a period of 24 hours. If the volume of news is greater than the average of news published over the last 7 days, it would give you an indication about the quality of the sentiment score and how much trust you should have on it. e.g. if the sentient score is very positive but the confidence is low, you should be sceptical of the sentiment. In summary, the more sources and the more information, the more accurate the AI will be in providing its level of confidence.  

That’s a good question and is one that was posed by a man with many years of experience in the markets, Charley Ellis. Ellis, after a stint on Wall Street, founded Greenwich Associates in 1972 which grew into one of the world's most respected research houses. He said:

“Go to a continuous-process factory sometime — a chemical plant, a cookie manufacturer, a place that makes toothpaste. Everything is perfectly repetitive, automated, exactly in place. If you find anything interesting, you’ve found something wrong.

Investing is a continuous process, too; it isn’t supposed to be interesting. It’s a responsibility. If you go to the stock market because you want excitement, then sooner or later you will lose. Everyone who thinks the stock market is a game loses — everyone, to the last man, woman and child.

So, the purpose of an investment policy is simply to ensure that your continuous process never breaks down...

Benign neglect is the secret to long-term investing success. If you change your investment policy, you are likely to be wrong; if you change it with a sense of urgency, you’re guaranteed to be wrong.”

There is a lot of sense in those comments after all the key to successful trading is finding a system, trading style or approach that works for you, and does so consistently.

Developing or creating that approach gives you your edge, which is something that every trader needs if they are to succeed and grow their capital long term. Creating a viable trading strategy or trading edge is the exact opposite to the random and emotional trading that sees many new and aspiring traders come to grief early on their career.

When we read about great traders, we often wonder what makes them different to you and me and what it would take to follow in their footsteps. Let’s be honest we probably aren’t going to be the next George Soros, Ray Dalio or Jim Simons. However, what we can do is to emulate their systematic approach to the markets.

Systemising your trading is about creating a set of rules which describe your trading approach, the opportunities you look for, and the risk management ratios you apply.

Once you have written these down, you have effectively created your trading plan, and what’s more, you have laid the groundwork for creating an algorithmic strategy.

An algorithm or algo is just a set of rules that a computer can follow and execute. Of course, nearly all trading today is conducted electronically. Yet, as much as 70% of that business employs algorithms to improve trading efficiency, execution quality and anonymity. The latter can be beneficial in retaining your trading edge and not seeing it arbitraged away.

A report by Business Wire predicts that Algorithmic trading will experience a compounded annual growth rate or CAGR of 10% per anum between 2018-2026. Two years into that period, and there is no suggestion that the analysis is wrong.

Using a rules-based system to decide when you should buy and sell is the key to maximising your profitability. And perhaps just as importantly, minimising your losses. Leaving those decisions to our emotional selves is not a viable option for long term trading success.

As we have discussed before, our psyche contains biases, emotional responses and short cuts that are not suited to trading and they can actually hinder the process. It’s far better to use a systematic rules-based approach that can help us run winners and cut losses rather than the other way around.

To take your trading to the next level, you need to ask yourself a question, and that is...

Have you developed a system, or are you just having a punt?

Do you follow a set of trading rules and stick to them each time you trade? Think about your trade sizes, risk-reward ratios, the use and placement of stop losses. Consider the average profitability of your trades and how often and by how much do the results deviate from that average?

Much of this data will, of course, be available to your in trade history and statements that’s one of the great benefits of electronic trading. It should be possible to identify the products you trade well and the time of day (your peak). Not to mention those times you switch gears and try to trade something you’ve never done before. E.g. an FX Trader dabbling into commodities because it’s “hot”.

A very effective way to systemise your trading and improve its efficiency is not to trade in the instruments, and at the times of day that you do poorly on. And instead, focus on the most profitable areas of your trading. You will be amazed at just how much difference that simple change could make.

Finally, ask yourself, are you getting too excited about your trading and the individual positions that you take? Do you wake up in the middle of the night dreaming about your positions or checking them? If you are, then you are probably taking too much risk.

You see a trader should largely ambivalent about individual positions, because if he or she has systemised their process, then trades will be a bit like riding the tube in London, that is, another one will be along in a minute.

What will or should be of concern to them, however, is whether they are making the most out of every trade that comes by. Better to be focused on the process and the system and not the individual trade outcomes. Transitioning from one way of thinking and approach to the other will very much put on the right route for trading success.