A common dilemma for Forex traders is whether to adopt a manual or algorithmic trading strategy that produces profitable outcomes over the long-term. But this question requires an individual to really understand their own capabilities when it comes to making decisions in high-pressure trades; and to recognize how technology can help overcome limiting psychological habits.
Manual trading: benefits and limitations
A manual strategy relies on the discretion of an individual trader. Substantial trading experience and a deep knowledge of the Forex markets are huge positives when it comes to forming profitable trading strategies and should never be discounted in favor of algorithmic technology. Experience nearly always equates to competency.
This means the experienced trader will have managed enough trades to know the dangers of acting on blind patterns and gut instinct, while knowing to avoid trading at times when the markets are particularly volatile. But even experience is prone to human error – and this is the negative side to solely placing trust in a manual trading strategy. Despite these psychological mine fields, if Forex traders take the time to watch their own psychological traits, it can lead to a dramatic improvement in the ability to make a manual trading approach successful.
Take recency bias for example. Forex traders can become influenced by the most recent trading results, without considering the bigger picture. Consider if a trader’s most recent trade loses, after a particularly pleasing run of results. Does this mean their manual trading strategy is failing? Of course not, the long-term strategy is still overwhelmingly positive. But these losses can cause traders to doubt their approach and whether they can generate consistent profits from the market anymore. Self-doubt leads to rushed and costly decisions, and this is real danger of manual trading. A simple way to counter recency bias is to keep a detailed record of previous trades. A manual strategy can then be refined by evaluating the hard evidence and taking emotion out of the process.
Luck & Greed
Luck and greed is another dangerous combination when it comes to Forex trading. As frustrating as it may seem, some traders adopt manual trading strategies that are incredibly risky, but make them rich in a very short space of time. These results are down to nothing but luck. But this risk taking mindset will lead failure over the long-term.
Traders who implement high-risk techniques can fall into the trap of believing in a manual trading strategy that is ultimately flawed. Unfortunately, this sort of thinking has lead to many Forex traders becoming broke when a high-risk trade fails. A conservative approach to manual trading will yield consistent profits over a longer period of time, increasing the traders experience, confidence and security.
Fear is psychological challenge that all Forex professionals face. It comes from many situations, but if left unchecked, it can completely paralyze the best manual trading strategies. As paradoxical as it sounds, fear usually comes when a trader is ready to increase the amount of money they trade on the Forex market; something which is necessary to make substantial profits. The trick is to not let fear induce inaction. Judgments should be made on hard evidence and nothing else.
Can algorithms correct psychological flaws?
An algorithmic approach completely removes psychological flaws from the trading process by relying on technology to take decisions on pre-defined parameters. Algorithms also take advantage of Forex trading opportunities 24-hours-a-day over the five-day trading week. Some of the largest financial institutions in the world rely on algorithms to ensure a consistent and sustained trading performance that eliminates human error.
But these algorithms are often formulated by some of the world’s most experienced Forex traders who have significant knowledge and experience of manual trades. They are also not available to competing traders and companies. Don’t be fooled into thinking that adopting an algorithm-based strategy is a guaranteed way to Forex trading success.
The quality of algorithms, which are often referred to as Forex robots, that are available to buy for individual Forex traders are simply not good enough to yield significant returns. These products can be typically bought on the Internet for around $150, but are really not worth purchasing. Why would Banks and blue chip companies invest huge sums of money into developing effective algorithmic strategies otherwise? With Forex robots, it’s a case of getting what you pay for. But the most important point to bear in mind with algorithm-based strategies is that they can work exceptionally well in tandem with a strong manual approach at a certain trading level, as they help identify instances of recency bias, greed and fear in trader’s psychology.