New traders always face the dilemma of how to learn forex without suffering significant losses in the process. There are two possible ways to do this:
(i) Open a practice account with a forex broker, and do virtual trades.
(ii) Use an expert advisor (either with a practice account or with a small amount of capital).
A trading signal or expert advisor is basically where you “piggyback” the trades of a more experienced trader. An “expert” can either person or a piece of software that implements a prescribed trading strategy.
“Trade automation” can also be done through what’s known as copy trading – see below.
Trades are replicated like-for-like into your account, and you achieve (allowing for slippage) nearly the same P&L (profit/loss) as the provider – proportional to the amount you invest. Slippage can happen where there may be delays in your broker receiving and executing orders coming from the signal, so that you don’t quite achieve the same market rates.
Learning from the Robots
If you do decide to use a signal or expert advisor, one thing to avoid is “trading in and out” of it.
The advantages of learning with an expert advisor, rather than trading yourself on a practice account are twofold.
Firstly You get to observe and learn from existing strategies first-hand.
Secondly You have real money at play (assuming you’re using a real account). You therefore have the chance to make real profits (or losses). This makes the learning experience more tangible.
That being said, a good amount of skepticism is needed. There are a vast number of forex systems out there – some promise huge returns and are aggressively promoted.
This is why it pays to do a thorough analysis of the software’s performance data. If something sounds too good to be true, it probably is.
The “Meta Trader” trading platform offers algorithmic trading via two different methods: Either (1) by connecting to an external “signal” which provides trade instructions, or (2) by using an expert advisor.
The signals that can be used are listed on the site MQL5, most of which are algorithmic expert advisors running at a remote location. Some are free, and others need a monthly subscription fee ranging from a few dollars, to a few hundred.
One advantage is that ZuluTrade offers a wide variety of strategies that will suit people with different risk appetites.
Signals are rated by other users and you can see the performance chart, and historical trading activity.
Be aware that even if the performance is displayed for a signal, there’s no guarantee that this is real trading performance – you have to take the whole system on trust.
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To subscribe to a signal, you’ll need to be using the Meta Trader Software (either MT4 or MT5) on your desktop or mobile device.
Moreover, in order to run the signal properly, you’ll need to have your Meta Trader software running continuously during market hours – day and night.
If you’re technically minded you can create your own expert advisors using the MQL language. There’s also a huge range of pre-made modules that you can download from the web. Some are free, but the better ones cost upwards of thousands of dollars.
If you don’t want the hassle of running your own software, there are many websites that offer “trade copying” accounts that can be setup in a few mouse clicks.
The biggest of these is eToro’s copy trader service. Copy trader allows you to create a portfolio of human traders. You can allocate an amount to each trader, and you’ll receive all of their trades in proportion to your copy amount. It even allows fractional lot sizes, so you can copy traders with amounts as low as $50.
Unlike eToro, ZuluTrade lets you subscribe to trading strategies rather than traders. Each strategy has a brief description, and the popular ones have ratings from live subscribers.
ZuluTrade is not itself a broker. You’ll need to open a separate broker account and link that to your ZuluTrade account. Usually this just involves signing a consent form and sending it to your broker – the account will normally be linked within a day or two.
Many of the strategies on ZuluTrade come through human traders though most are using software to automate. One advantage is that ZuluTrade offers a wide variety of strategies that will suit people with different risk appetites:
- Conservative fundamental approaches
- Aggressive scalpers
- Grid traders
- Systematic trend followers
- Hybrid strategies
The system is partly automated in that you can’t set an allotted cash amount like you can with eToro.
If your provider exceeds your drawdown, the signal can be stopped and any open positions from that provider closed.
What you can do is set the maximum number of open trades and lot size per strategy. It’s a bit more involved than eToro’s system. Be aware that if you don’t get the settings right you can potentially over allocate and receive a margin call. This can adversely impact your returns.
If you’re not sure it’s best to use the auto allocation method and to back test your signal providers with your account settings and lot sizes. There’s a simulation feature where you can back test any of the signals with your own account settings. This is useful for checking performance and volatility.
Check with your broker: Another point to consider is whether your broker allows your chosen strategy. You’ll need to check this carefully. For example, many forex brokers don’t allow scalping as it involves sending rapid, high-throughput orders to their servers which can negatively impact other users.
Capital protection: ZuluTrade also has a decent capital protection system which runs continuously in the background. This feature lets you limit the loss of any single provider just like a trailing stop.
If your signal provider has a drawdown, greater than your pre-set trailing stop, the signal can be stopped automatically and any open positions from that provider closed (for a more detailed description of ZuluTrade see here).
Pros and Cons
The advantage of ZuluTrade and eToro is that these systems run within their own managed platforms. If you use a 3rd party signal, such as MQL5 generally you’ll also need to buy VPS hosting so that your trading program is running continuously. Alternatively, you can choose one of the brokers that offer free VPS hosting to their clients.
If you try to use your own PC at home to run an advisor, this can be risky because your trading may be interrupted at critical times by power outages, crashes and so on. If your strategy is not operating during important market events, you risk stop losses being overrun (some algorithmic systems apply stops dynamically – these can be very risky to run at home), and profitable trades not being executed.
Avoid “Trading” Your Signal
If you do decide to use an automated trading system, one thing to avoid is “trading in and out” of it. It can be a temptation to switch to another signal that seems to be performing better, however this is not generally a good idea.
It’s extremely important to remain invested during normal drawdown periods. Be aware that drawdown is an expected and unavoidable part of most strategies.
Those people who “trade in and out” of their expert advisors typically make the same mistakes they do when trading directly. That is chasing profits that have already been realized, selling in troughs and buying in peaks.
Past Performance is Not a Guide to the Future
Always remember the caveat that past performance of any strategy is not a guide to the future. If you look at the subscriber statistics for any of these signals, it’s clear that the majority of followers enter after the signal has delivered its most significant profits, and they exit after it has made its most significant losses. In other words, most people lose money, or at best never make anything due to continuously changing signals as soon as performance isn’t meeting expectations.
Most strategies are medium to long-term. It’s best to set a review period either fortnightly or monthly, and systematically review the performance of your strategies against your own goals. If at that time any are not meeting your expectations, then quit.
At the opposite end, there are optimists who stick with a system (or human trader) even when they make continual losses.
Ultimately it’s your own responsibility to determine the suitability of any signal or expert advisor before placing your money with them.