Automated trading is rapidly gaining popularity, especially in retail forex trading and for good reasons. If executed correctly, it can be an effective way of earning a living, and best of all, it will be passive income.
There are solid reasons why one would consider trying out automated trading. If you are a successful trader and you have a working strategy, you might want to automate it so that you have more time to do the things you love and to be with the people with love while still making money from the market. However, going down the path of automated FX trading is easier said than done.
Automated FX is about using code to execute trades and close trades automatically. One can develop a forex trading bot that can perform those tasks. A trading bot is a coded program or algorithm that reads the charts, identifies market conditions that match with the trader’s strategy, and execute trades based on the criteria of the trading strategy.
Algorithmic FX trading leverages mathematical tools, as well as strategies that help the automated forex trading system to make buying or selling decisions. It means that the automation algorithm has to be able to read the charts so that it can identify investment opportunities. There are three main chart types used in the forex. They are line charts, bar charts, and candlestick charts.
A line chart is a linear representation of price movement over time, and it mainly tracks closing price. Below is an example of a EUR/USD line chart.
It is not the best suited for using indicators, but if it were to be used with an automated trading system, then the Algorithmic FX trading system would track price. For example, the system would execute trades and close trades once they reach specific price points that would be preset into the system.
This type of table keeps track of opening prices as well as closing prices. Each bar also the highs and lows during specific chart durations. For example, a bar on the 1-minute bar chart can indicate the opening price point, the highest point, the lowest point, and the closing point. This type of table is shown below.
Below is an example of what each bar looks like.
The above type of chart provides more data that traders can use to their advantage in formulating their strategies for more accurate trading, and this information can be better tracked with the help of indicators. More information is also vitally important in developing a trading bot for automated trading. An algorithm trading system can make more sense of the charts with the involvement of such price information and also the involvement of indicators.
Candlestick charts are not so different from bar charts because they display similar information, which includes a candlestick’s opening price, closing price, high and low. The differences between the two chart types are aesthetic. The candlesticks charts look more appealing compared to bar charts. Candlesticks can either be black and white, where the white indicates a bullish price while the black indicates a bearish price movement. They can also be red and green, where the green indicates an upward price, and red candles indicates bearish price movement.
Candlestick charts are the most popular chart type because the layout and interpretation are easier, especially when colored. Below is an example of an ugly EUR/USD chart in the candlesticks chart type.
The candlestick charts are the best when it comes to the implementation of useful trading tools such as indicators to help the trader make more sense of the market from a technical analysis point of view. They are also best suited for automated trading because they give a clean look at the market, and once again, they provide essential data and the flexibility of switching to different time frames based on one’s preference.
There are many brokers out there whose trading platforms offer the flexibility of using your preferred chart type. It means you can customize the charts to your liking. Some popular trading platforms such as MetaTrader now provide tools through which traders can develop trading bots which traders can use to automate their strategies. Making an automated FX trading system based on your chart type layout and indicators are essential and for good reasons. If you can develop a solid plan that has a high success rate, then you can probably automate that strategy. The automation should be based on an already successful trading system.