Automated Trading Systems and the Forex Market

By Dan Blystone

As the editor of a website focused on trading and investing I try to keep track of industry related trends and the hot topics of the moment. Notably, the combination of the forex market and automated trading systems has generated a massive hive of interest online. In this article we’ll cover the salient characteristics of trading systems and the forex market. We’ll also take a look at platforms offering the development, backtesting and automation of forex trading systems.

Trading systems have, of course, been around for decades. Many leading traders have long understood the virtues of using mechanical trading systems. Back in the early 1980’s Richard Dennis’ ‘Turtle Traders’ were sticking to a rigid set of rules, a mechanical trading system – the system itself a closely held secret for many years. The use of trading systems has been central to the success of many if not a majority of top performing traders.

A trading system is simply a set of specific rules, or parameters, governing entry and exit points. The technological advances of recent years have opened up a world of opportunity for the individual trader through the use of trading systems. For example, thanks to the internet and the PC, backtesting analysis of a trading system that would previously have taken months or years can be now done within minutes. Further, trading systems can now be fully automated – having the ability to both generate signals and execute trades automatically. Online communities of traders from all over the world, discussing and sharing strategies, are springing up and thriving.

The foreign exchange market is the largest and most liquid market in the world with trillions of dollars being traded daily by governments, banks, and large institutions.  The volume traded in the foreign exchange market is several times greater than the total cash volume of the stocks and futures markets combined. This highly liquid, highly volatile market only relatively recently became available to the mainstream trading public. Prior to the late 1990’s an investor was normally required to have millions of dollars to access the market at all. Technological advances and the advent of the internet have finally brought this market into the hands of the ‘retail’ trader.

In order to see why trading systems and forex have made such a compelling combination to traders, let’s start out by taking a look at their respective advantages:

Advantages of Trading Systems

– A rigorously tested trading system gives the trader confidence, and a framework for discipline.
– Trading systems take the emotion out of trading. Unlike a human, an automated trading system will never second guess itself, or be misguided by fear and greed.
– Automated trading systems free you of the necessity of being in front of the markets at all times. Once an effective system is developed and optimized it can be left to run independently. Being a 24 hour market, some of the best forex trading will likely take place in the middle of the night regardless of your location. For example, if you are a trader in the US trading GBP/USD – you will likely be asleep during the volatile London open. Automated trading systems allow you to capitalize on market movement at all times. An automated system will allow you to focus on optimizing your strategy and money management rules rather than having to constantly watch the market.
– The use of automated signals and order execution allow you to trade multiple markets simultaneously rather than being glued to the movements of one market.
– Trading systems will increasingly afford faster identification of signals and reaction to them. As you might imagine, a machine will typically beat a human in the speed of identifying a trading signal and the entry of the corresponding order.

Advantages of the Forex Market

– The forex market is a true 24 hour marketplace five days a week, allowing for uninterrupted trading.
– The market is massively liquid: under normal conditions there is no problem entering or exiting a trade.
– There are no commissions, only spreads.
– There is no fixed lot size allowing a great deal of flexibility in your position sizing.
– The scope of the market is so vast that it is impossible to for any entity to manipulate it for an extended period.
– Forex dealers typically offer a great deal of leverage, sometimes as high as 400:1. Bear in mind this can work against you also if misused, and is probably the single factor contributing most to the failure of novice fx traders.
– Short Selling. Unlike the equity market, there is no restriction on short selling in forex.
– The market is highly volatile, creating many trading opportunities night and day.

Components of a Trading System

In developing a trading system the following basic components need to be considered:

– Market and timeframe.
– Entry. The trigger that initiates your buy or sell signal.
– Stop Loss. The level at which you will cut your losses in the event of the trade going against you.
– Profit Target. The level at which you will exit the trade to take profits.

To give you an idea of what a basic system might consist of here’s an example:

– Market and timeframe: EUR/USD, Daily.
– Entry: Buy entry occurs when the 50-day moving average crosses above the 200-day moving average. Sell entry signal occurs when the 50-day moving average crosses below the 200-day moving average.
– Stop Loss: Set at 50 pips from the entry.
– Profit Target: Set at 200 pips from the entry.

An oscillator such as RSI (Relative Strength Index) could be used as a filter – so that you only enter a long trade when the RSI indicates oversold conditions and a short trade when the RSI indicates overbought conditions. The conventional wisdom holds that fewer parameters or ‘rules’ are better in developing trading systems.

A system like this can be programmed to auto-execute in a trading platform. Alternatively, the system could be ‘semi-automated’ whereby you are alerted when the entry trigger occurs, and oversee the placement of the trade yourself. Alerts can be audible through your computer, sent to your email or even sent as a message to your cell phone. The semi-automated system clearly carries less risk, with you being there in person to ‘pilot’ the system and execute the trades manually. A fully automated system should be rigorously tested both in a simulated and live environment.

Now let’s take a look at some of the Trading Plaforms that are making the automated trading of the forex market possible:

is a forex trading platform built by MetaQuotes. The MetaTrader platform has a built in programming language called MQL4 (MetaQuotes Language 4) that allows the user to create and backtest trading strategies using historical data. MQL4 is used to write Expert Advisors, mechanical trading systems which can be used for both trading alerts and automated trading. Custom Indicators are indicators created by you or by other MetaTrader users in addition to the suite of built in technical indicators. MQL4 is easy to learn and understand even for those with limited programming experience. MetaTrader has a large and active user community online, discussing strategies and helping eachother with programming issues. The MetaTrader platform can be used with a variety of different forex brokers.

TradeStation has been a pioneer in trading systems development, backtesting and automation. Tradestation 8.3 allows you to design and backtest forex trading strategies using their EasyLanguage® technology. Forex trading strategies can be fully automated through their platform. TradeStation also offers automated trading of the stocks and futures markets. The TradeStation platform is now incorporated with a brokerage firm, TradeStation Securities.

Strategy Runner is another innovator in the world of automated trading systems, offering fully automated trading with high-quality execution of trading strategies using a server-based solution. Strategy Runner hosts and executes your strategies for you on secure servers located in the broker’s facilities, ensuring that technical problems on your computer will not interrupt trading. The platform allows you adjust or manually override your strategies at any time. Strategy Runner also offers the Strategy Exchange, a marketplace of automated trading strategies developed by industry professionals. The Strategy Exchange allows individual investors to select and build their own automatic systems portfolios and then auto-execute them via Strategy Runner.

Educational Resources

Among the hundreds of forex trading websites, I think there are three that really stand out. These sites offer excellent free educational resources, provide in depth coverage of forex trading systems and host active communities. They are:,,


Both the forex market and trading systems are here to stay and have a long evolution ahead. The future outlook is bright for the speculator – increased fx market regulation, tighter spreads, better execution and constant innovation and improvement in trading systems technology.