Automated or Manual: The Debate for Forex Signals
Introduction
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Evolution of Forex Trade
Over the years foreign exchange industry has evolved rapidly along with the signal industry, mainly during the last decade. Even an inexperienced trader can find several services that offer forex trade signals based on various trading strategies and plans. There are a lot of options to choose from such as:
• Automated as well as manual signals from investment banks, hedge funds, pension funds, companies and even forex exchange websites.
• Social networks like Facebook, LinkedIn or Twitter as well as manual signals from Forex blogs.
• Signals from brokers with a vast social trading network such as tradeCrowd and eToro etc.
• Trade or algorithmic robots that can be purchased online to give automated signals.
• Manual signals delivered through MQL network, which allows you to follow and copy trades of forex traders.
Trading softwares developed by collaboration of traders, statisticians and mathematicians are based on various technical indicators such as moving averages, price action, Stochastic Oscillator, Ichimoku Cloud etc and are capable of issuing automatic signals. Also referred to as Automated or Algotrading, it is another name for short-term trading. These automated trading software and system is based on historical data developed over all the years and are back tested to check their performance.
Trading Techniques Behind Automated Signals
Some of the trading techniques on which the trading software that generate automated signals are as following:
Trend Following
New trends in the market are identified and signals are opened in that particular trend’s direction.
Reading Price Action
Price movements are observed to decide the weaker side and a signal is opened in that direction.
Assessing Pullbacks
Recognizes the end of pullback and opens an automated signal in its opposite direction.
Recognizes Tops and Bottoms
Picks up on the market trading range and opens a sell signal at the top price and a buy signal at the bottom price of the trading range.
Scalping
Scalping involves identification of short term opportunities and opening a signal. It involves high frequency trading which involves opening and closing of trades within seconds. It is a type of algorithmic trading.
Risk Involved in EAs
Automated trading software is also referred to as an Expert Advisor (EA) as they advise you on trading. Most of these Expert Advisors are based on Martingale method. Martingale method means you double the funds after every trade, which increases your trading exponentially. Although these EAs can be profitable when a trader is on a streak but risk involved is equally great and entire funds can evaporate after a few trades.
Let’s suppose you risk and lose 2% of the account during the first trade, Martingale method implies you risk 4% on the next trade. Losing again means you’ll be down by 6% in just two trades. After six trades you would have lost your entire account and that might seem implausible but it is highly probable and likely in the world of forex trading.
Risk Involved in Manual Signals
On the other hand, manual signals are always issued by actual humans. Websites employ teams of experienced traders and financial analysts who conduct market analysis before opening signals. Most of these websites have teams of financial analysts for long term trading as well as short term trading. Investment banks also hire teams of accountants and analysts for analyzing balance sheets, revenue, profit/loss statements, cash flow and shares of different companies to calculate their actual value.
Signals opened by groups on social networks and forex trade blogs are mostly issued by individual traders. This raises a concern over their credibility and thus their signals cannot be relied on heavily. MQL Network and trading brokers such as TradeCrowd, eToro etc can help you in visualizing trader performance and picking the most successful and profitable ones.
Automated or manual, both the signals have their flaws and drawbacks and finding a perfect trading system or strategy is highly unlikely as the forex market changes its behavior constantly. Therefore no signal opened by any particular EA or forex blog can prove to be profitable all the time, regardless of it being automated or manual. The argument of which type of signals are better, is therefore wasted. But highlighting the pros and cons of each system can prove to be helpful.
Advantages of Manual Signals
Trading indicator
Manual signal serves as a great trading indicator. It is a very handy tool for all traders. Manual signals highlight good trading openings in the market. Traders who prefer to carry out their own analysis and build their own strategy can use the manual signals as confirmation for their analysis. There’s a lot of learning material available on the web that can teach beginners the art of trading. When using manual signals, a trader doesn´t have to follow all of them. Instead, they can opt to follow only those signals that fall in line with their research and analysis. With manual signals, a trader can decide the risk level himself too, depending on the trade market conditions. All the trading operations are carried out by the trader so if the market is extremely volatile, the trader can decrease the lot size during that time and increase it after the market has calmed down.
Larger Profit Targets
Unless your manual signal provider is using a scalping strategy to open signals, the profit targets are mostly larger than automated signals, more so if you consider those high frequency signals that target fractions of pip. Manual signals issued by banks and large companies to their clients mostly target hundreds of pips. Many companies have opened a buy signal in Yen pairs during the last few months as most of them are taking advantage of Yen’s weakness in the exchange market for a huge number of pips.
Low Risk to Reward Ratio
Since all the manual signals usually have large take profit targets, their risk to reward ratio is very low. For most of the signals the risk to reward ratio is below 1:1.
Human Intelligence
Algorithms are no match for human intelligence and that is considered as one of the biggest advantage of manual signals over automated signals. Most of the experienced traders have a good sense of shifting trends of the market and can spot a good trading opportunity much better than any trading software. Since the volatility in trading market is based on crowd psychology, manual signals are ideal indicators as they are based on human logic and decision making.
News Trading
Trading the news can be very profitable. Trading robots are unaware of the time outcome and time of the news so these signals are normally only opened by manual signal traders. There are plenty of ways to trade news that offer great profitable trading opportunities. Manual signals that open just before the news offer you a chance to trade the position right before the event. Trading on the knee jerk reaction caused by the news can be profitable. Post news trading is also beneficial as it helps in pointing towards the real direction of the market after the reaction generated by news. News trading methods are only available for manual signals.
Fundamental Analysis
It is an integral part of market trading and should always be taken into account as it decides the future direction of all the financial markets. Fundamental analysis is a lot more than news trading. It considers market sentiment, economic as well as political data altogether. Most of the good, experienced financial analysts offer manual signals based on fundamental analysis which has fruitful rewards for the traders.
Adaptability
Manual signals are more adaptive of market fluctuations. In fact, majority of the profit made in Forex trading is made by letting all the winning trades run for as long as they can. When a trader receives a manual signal indicating a trade headed in the right direction, the manual signal providers can widen the profit level and thus increase the profit drastically.
Disadvantages of Manual Signals
Time Consumption
Although it is not a big issue for a trader receiving a signal, but still opening the trade platform and executing the trade can take time.
Missed Trading Chances
It is not possible to follow all the signals especially the signals opened during nighttime and thus a lot of trading chances can be missed.
Emotions
Human emotions can affect the trading adversely. Greed and fear are two driving emotions that are reflected all too well in manual signals sometimes. Most of the volatility in a market is caused by these emotions. For example large swings occur in market trading due to fear of loss which sees traders buy and sell within a few hours.
Trade Market Range
Although most of the manual signal providers make sure that different teams of analysts cover different markets at the same time but some only focus on a selected few currency pairs. Especially single-person signal providers.
Advantages of Automated signals
Effective for New Traders
Most of the beginners struggle during their first few year of trading and might blow their initial accounts pretty quickly. In this case, an automated signal provider with a good and effective system can deliver profitable results as the trader gains experience of the Forex trade market.
Confidence Builder
Automated signals help fresh traders gain confidence regarding the market. Most of the beginners are reluctant at first to open trades as they are not confident enough about their analysis. Automated signals help gain confidence as new traders observe a trade’s right direction with the prices approaching profit target.
Unemotional Trading
As discussed earlier, emotions like greed and fear can adversely affect trading but automated trading eliminates that risk and therefore the automated signals a trader receives are emotion proof.
Back testing Robots
Trading robots designed for back testing can be applied to the data to observe their reactions during all the years of history for a particular pair. A trader can then decide whether to run the software based on the outcomes of back testing.
Execution Speed
Computers are exponentially faster than humans and can act instantly. Their fast execution can save a trader many precious pips.
Range of Markets
Currency pairs are all the same to an automated trading system, unlike human analysts who specialize in a few pairs. Therefore a trading robot has the ability to issue signals for all pairs if certain terms are met. A trading robot can open signals on Forex trade majors, minors, indices, crosses, bond market, commodities, precious metals etc, but a human can’t follow all of the forex pairs along with other market instruments.
Time Saver
Automated trading robots can save you a lot of time, as you don’t have to sit in front of a screen all day to trade as your trading robot does all the work for you at all times.
Disadvantages of Automated Signals
Small Take-Profit Targets
Automated signals have small take-profit as well as stop-loss targets compared to manual signals and thus they miss out on most of the trade market action driven by news or other fundamentals.
High Risk to Reward Ratio
As take-profit targets are small for automated signals, risk to reward ratio increases.
Inflexibility
Market trading requires flexibility as market situations change very quickly and thus traders need to close trade accordingly. However trading robots are unable to adapt to these variations in the market.
High Trade Volume
Since take-profit targets are smaller as compared to manual signals, trading volume needs to be high, because volume to profit ratio is very small so gains or profits from single trades are very small. Thus engagement of a lot of more funds is required to make the same profits as manual signals.
Breakdowns
Technical failures can occur which will prove to be fatal for your trade account.
Verdict
As discussed previously, both systems of trade signals have their pros and cons. Both these systems can prove to be effective in different market scenarios so a trader can choose to use both in order to maximize the profits.