How to Trade Like an Algorithm

Follow these steps to apply a cold, robotic focus to your trading

Trade like an algorithm - strategy comparison
Cory Mitchell

Every profitable Forex trader needs a good, well-understood strategy. Moreover (as though that weren’t already a Herculean task), you have to be highly disciplined, able to execute your strategy with complete accuracy. That means no jumping the gun and opening a trade before the right signal comes, or closing a trade before it’s reached its potential. Sounds easy, but emotions stand in the way, especially when a significant amount of funds are involved.

When it’s time to engage or disengage a trade it’s often hard to make a quick decision and stick to your strategy--people tend to "choke" when the stakes are high. In the end, you may end up with a great strategy but dismal performance all because your emotions got in the way.

In order to become a disciplined trader, you have to learn how to neutralize your emotions. Yet mastering discipline and neutralizing emotions is, for many traders, a daunting challenge. Many regularly struggle and wonder whether discipline is something you need to have been born with.

Some traders now exclaim that there is a new middle path: Algo trading. That is to take your strategy and employ a cold, emotionless robot-like approach to execute it. Theoretically, that sounds like the ideal way to optimize your trading as it overcomes the “human” element. In practice, that methodology falls somewhat short. You need to adapt your strategy and practice to make the algo strategy work in a way that allows you to perform better.

The good news is that there are easy to use concepts that all levels of traders can benefit from. The ideas from Forex4noobs are easy to learn and to implement; without even writing or using an algo you can trade as efficiently as an algo.

The Trade Like an Algo To-Do List

In order to become efficient as an algo trader, you need to make the same preparations as though you were about to write an algo (no coding required!).

Clear Rules of Engagement – The first thing a trader preparing to write an algo has to do is to create a spreadsheet with a very specific list of rules for engagement and disengagement. A computer program cannot make decisions without clear instructions. So whether it’s two moving averages crossing or an RSI above 80 (just as examples, not advice), your instructions have to be clear and binary. By that I mean either yes or no, go or no go; there should be no grey areas (see Best Technical Indicators for Day Trading).

Once you have input the “rules” that becomes your “playbook;” if the conditions are a yes, you open a trade, if not, then you don’t. It’s as simple as that. As long as the conditions remain a yes then the trade should be opened; if the conditions evaporate you disengage and close your trade. And what if it’s a grey area? There should be no grey areas. If you can’t answer yes or no then your conditions aren’t clear enough for an algo and thus not clear enough to maintain discipline. Once you can answer yes or no, through the various indicators and the trade’s lifespan, then can you start a trade in a rational, non-judgmental manner.

Sample Dashboard
PairEMA CrossRSI Below 20MACDExecute?
GBPUSDYesYesYesYes
EURUSDYesNoYesNo
EURJPYYesYesYesYes

Document your Results – While documentation may sound boring and tedious, it’s an absolute necessity. Documenting each trade on your spreadsheet means inputting when the trade was executed, how much you gained or how much you lost (see Easiest Way to Keep a Trade Journal).

One Strategy at a Time – When building an algo, it’s important to start with one simple strategy rather than applying a few. While a manual trader may be able to trade on a few ideas, algos are usually initially structured around a single strategy. While, later you may combine a few strategies it’s important that each strategy works as a standalone mechanism. That is because different strategies may have different triggers at different times which may coincide or even conflict with another. More importantly, you can actively analyze the profitability of each strategy, knowing which works and when, rather than getting a noisy data set from several strategies (see attached chart...when different strategies are isolated you can compare them easily).

Don’t Trust Your Instincts

Of course, as always in Forex trading, it all boils down to how it will improve your performance. After all, it does add more chores to your day-to-day trading...so is it worth it? Quite simply, algo trading allows you to neutralize all the emotions and eliminate gray area decisions so you can focus on your strategy. The algo process in and of itself forces you to simplify and leave no room for spur-of-the-moment decisions. Because let’s face it, with the Forex market dominated by sophisticated banks and hedge funds, you must monitor your performance closely. Whatever you do, don’t trust your instincts. As you’ve probably already discovered, instincts are almost always “infected” with emotions, and emotions and trading just don’t mix.

Trade Like an Algo - Final Word

If you have trouble with emotions while trading, be an algo trader. Focus on one strategy and make it rule based. No gray areas. If you question what to do, your rules aren't specific enough.This type of trading isn't for everyone. Some people have developed their discipline so they can do the right thing in spite of their emotions. But trading like an algorithm is a definite advantage for some traders. You'll still face hurdles, but at least you'll have a clearly defined path for how to navigate them.