Monday, November 20, 2017

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FOREX TRADING STRATEGIES

Forex signals - Auto vs. Manual

 



We have explained in previous articles how the foreign exchange (forex) industry has evolved through the years alongside the signal industry, especially in the last decade. Even if you are an inexperienced trader you can find numerous services, which will provide you with forex trade recommendations or signals that are based on different trading strategies. You have all the options you can choose from, some of them being:

  • Automated, manual signals from large banks, pension funds, hedge funds, companies and websites such as Fxmarketleaders.com.
  • Manual signals from social networks like Facebook, Twitter, LinkedIn, and Forex blogs.
  • Automated manual signals from brokers with social trading networks like eToro, tradeCrowd etc.
  • Automated signals from algorithmic or trade robots which can be purchased online.
  • Automated manual signals from the MQL network, where you can follow and copy the trades of individual traders, or traders signaled by trading software that have been developed.

 

Ae's trading robots

As we said above, the automatic signals are issued by trading software that has been developed by a mix of traders, mathematicians, and statisticians. They are based on different technical indicators like price action, moving averages, Ichimoku, Stochastic, RSI etc. Automated, or "Algo trading" as it is often referred to, is usually for short-term trading.
The automated trading systems and software is built based on historical data (charts) and back-tested to check how they perform.

 
The different strategies are as so:
  • Following trends- Identifies trends and opens signals in the direction of the trend.
  • Reading price action- Observes the price movement in order to decide which side is weaker and then opens a signal in that direction.
  • Entering on pullbacks- Recognizes when the pullback is over and opens a signal in the opposite direction.
  • Picking tops and bottoms-  When the market trades in a range, the software opens sell signals at the top or buy signals at the bottom of the range.
  • Scalping-  Identifies short-term opportunities and opens signals for a few pips target.
  • High-frequency trading is a part of this.  
  • High-frequency trading signals- which open and close trades within seconds or even milliseconds, are a form of algorithmic trading.

Man drawing trading charts
 

The automated trading software which you can purchase and implement in your trading platform is called Expert Advisors (EA's) since they advise you to trade. Some of these EA's use the Martingale method; this method implies that you double your funds on every trade, and thus your trading increases exponentially.  These EA's can be very profitable when you are on a winning streak, but the risk is equivalent, and you might see your entire account evaporating in only a few trades.

For example, if you risk 2% of the account on the first trade and lose, you´ll risk 4% on the second trade. If you lose again, you´ll be 6% down and down by 8% in the third trade… so on and so forth. So, if you have a bad run, you could lose your entire account in only six trades, and we know all too well that is perfectly likely. 

Manual signals, on the other hand, are issued by humans. Website's such as Fxmarketleaders.com employs teams of financial analysts and experienced traders who conduct market analysis and open signals. Some of these companies/websites have a team of analysts for long-term trading signals and another team for short-term signals. Long-term investors hire teams of accountants who analyze balance sheets, cash flow, revenue, profit/loss and dividends of different companies in order to discover their real value and see perspective.

robot instructing man

The signals that you get on social network groups and forex blogs are almost always issued by individual traders, and their credibility is questionable since there is no justification on their qualifications or experience. On the MQL network and social trading brokers like eToro, Trade Crowd, Tradeo etc. you can visualize trader performance and choose the most profitable and successful ones.

Now, both types of signals have their disadvantages, and it´s naive to think that you will find a trading system or strategy without any flaws. The Forex market keeps changing its behavior continuously, so no signal provider will be profitable 100% of the time, human or automated. Following this logic, this article is not supposed to decide which type of signals are the best; there are times when manual signals work better and other times when the automated signals are more profitable. We are just highlighting the advantages and disadvantages of both signal types. 
 

Manual Signals Advantages

  • Trading tool/indicator- Manual signals, in particular, are a very useful tool for any trader, as they can be considered an indicator which highlights good trading opportunities. You can carry out your own analysis, build your own strategy and use the manual signals as a confirmation of your analysis. There are many good learning materials on the web and you can find such materials here on our site. You can check out our trading course, trading strategies or the market daily, weekly and monthly analysis on our blog.
    With manual signals, you don´t have to follow them all. Instead, you are in charge of your own account, so you can choose to follow the ones that fall in line with your analysis. With manual signals, you can arrange the risk level as well, depending on the market conditions. All the trading functions are carried out by you, so when the market is very volatile you can reduce the lot size and increase it again after the market calms down.
  • Larger take profit targets- Unless the signal provider uses a scalping strategy, the profit targets are usually larger than the automated signals, especially if you take into account the high-frequency signals which target fractions of a pip. Manual signals that banks or large institutions issue to their clients usually targets hundreds of pips. Many institutions have issued buy signals in Yen pairs in the last 6-7 months, some of them riding the Yen's weakness for thousands of pips.
  • Lower risk/reward ratio- Since the manual signals have larger take-profit targets, they offer lower risk/reward ratio with most of them being below 1:1.
  • Human intelligence- Computers don´t even come close to human intelligence and I don´t think they ever will, so this is regarded as one of the strongest aspects of manual trading signals. Many experienced traders have a good feel of the market, and they can recognize good buy or sell opportunities that result in very profitable trades - often not detectable by a robot.
    Since the market is driven by crowd psychology, manual signals are steeped in human logic. In the few trading sessions leading to the FED statement on June 17th, we issued some USD buy signals on different pairs because we knew that fear in the market would unload some of the short dollar positions, which have been built in the previous weeks. There´s no way a computer could know these things.
  • Trading the news- This can be very profitable, and since the trading robots are not aware of the time and the outcome of the news, these types of signals are only issued by manual traders. There are different ways to trade the news, which offer great winning potential. With manual signal providers, you get signals just before the news so you can trade the position before the event. Right after the news release, you can immediately trade on this knee jerk reaction of the news; you get post-news signals aiming to benefit from the real directional move after the market has digested the news/data. All of these news trading techniques are available by manual signals only. 
  • Fundamental analysis- Fundamental analysis is a very important part of trading and shouldn´t be skipped because it decides the direction of the financial markets.
    It is more than just news trading, as it takes into account the market sentiment, political and economic data all at once. Experienced analysts offer signals based on deep fundamental analysis, which offers great rewards. We issued many short and long-term EUR/USD sell signals before and after the ECB announced the beginning of the Quantitative easing in March, because we knew how the market would react where automated signals would not.
  • Adaptability- Manual signal providers can adapt to market fluctuations. Most of the profit in Forex is usually made by letting the winning trades run as far as they can. When you receive a manual signal for a trade which seems to be going in the right direction, the signal providers might widen the take profit level and increase the profit dramatically.

     

Manual Signals Disadvantages

  • Time consuming- It´s not a very big issue for the receiver, but as a client you still have to open the platform and execute the trade.
  • Missed trades- You cannot follow all the manual signals, which may have been issued during the night or during work hours.
  • Human emotions- Fear and greed are two human emotions that affect trading, and manual signals can sometimes reflect these emotions. The recent market volatility is a great example; in the last two weeks we have seen the market buy the US Dollar after the impressive economic data, but a few hours later minds are changed and large swings are caused from fear of loss. The 500 pip Euro rally in the first three days of June came as a result of greed; the rumors of a Greek/EU deal sparked the move and everyone got greedy rushing into buying Euros. This sent the Euro to an unreasonable 500 pips against the US Dollar.
  • Market range- Although many manual signal providers have different teams covering different markets, several only concentrate on a few currency pairs, especially the single-person providers. For instance, if a signal provider specializes on the Forex major pairs, all other pairs of the minors and crosses as well as the other financial instruments markets will be left out.

    hand wrestling human vs robot.jpg

Automated Signals Advantages

  • Available for new traders- People who are new to the business struggle in the first few years. Most of them blow their first accounts quite quickly. A signal provider with a good automated system can deliver good results while the new trader learns more about Forex. 
  • Building confidence- Automated signals can increase the confidence of new traders concerning the market. Many new traders are hesitant to open trades because they´re not confident about their analysis. With trading signals, they can gain confidence as they observe the trade's correct direction with the price approaching the profit targets.
  • Unemotional trading- A robot is senseless, and, therefore the signals you receive are unaffected by human emotions.
  • Back-testing Trading robots- can be applied to the charts to see how they would react during years of history for a certain pair. You can choose whether to use the software depending on the outcome.
  • Execution speed- The computers act instantly and the fast execution can save you precious pips.
  • Wide range of markets- All currency pairs are the same to an automated trading system, unlike the human traders who specialize and concentrate on a few pairs. So a robot can issue signals on every pair if certain conditions are met. A robot can issue signals on Forex majors, minors, crosses, on indices, the bond market, precious metals, commodities, etc. A human cannot follow all the Forex pairs and other financial market instruments.
  • Time saving- You don´t have to be in front of the screen all day to trade; with the trading robot doing everything on its own at any time - day or night.

Automated Signals Disadvantages

  • Small profit targets- The take profit and stop loss targets of automated signals are usually small, so they can miss the market's action which is driven by news and other fundamentals.
  • High risk/reward ratio- Since the take profit targets are small, the risk/reward ratio increases, especially when you trade with brokers or pairs with large spreads.
  • Inflexibility- Trading robots cannot adapt to market variations. In trading, it´s very common to be on a winning trade and suddenly the market changes direction and you have to close the position with whatever profit you have. The automated signals software cannot change the stop loss and take profit targets, so you have to stick with the position until it reaches either one of the targets. Therefore, you might end up with a loss instead of a profit, due to the lack of flexibility in these types of signals.
  • High trading volume- Since the take profit targets are small, the trading volume is high and the volume/profit ratio is pretty small (especially with the high-frequency signals). The gains from each trade and/or signal are very small, so you have to engage a lot more funds to make the same profit as the manual signals.
  • Breakdowns- Sometimes there might be technical failures caused by viruses or PC malfunctions, which could be fatal for your account. A technical error, or a virus in the software might increase the leverage enormously, and you could risk your entire account on a single trade. One such occasion happened in 2012 when Knight Capital, a leading automated trading company, executed voluminous trades which disrupted the NYSE. It happened as a result of non-compatibility between the old and new computer programs and nearly bankrupted Knight Capital.
 
As mentioned above, we are not here to pick a winner between manual and the automatic signals. There are several signal providers, with successful and unsuccessful signal providers on both sides. The automated trading reached a peak in late 2000 but has declined by more than 50%. I prefer manual signals because the winning potential is greater and the trading volume is lower, but anyone who is looking for signals should weigh the pros and cons of both and choose whatever is most suitable for them. You can also decide to use both in order to maximize the benefits. Such as, when the markets are volatile and irrational you might follow automated signals - and when markets are more logical you can follow manual signals.
 
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