The first thing you will hear whenever forex trading comes up is the rate of monthly returns. On the one hand, aspiring traders want to know if the activity is worth their time. Also, they want to confirm whether what they heard before making a move towards forex trading is true or false. On the other hand, professional traders worry about returns because their life depends on it.
In pursuit of more significant profits, an increasing number of traders are opting for algorithmic FX trading. They hope that the ability to preclude human emotions from trading will reduce mistakes and lead to higher profits. To that end, professional traders are developing forex expert advisors at a furious rate to exploit their rising demand. Unfortunately, some bad actors are taking advantage of the situation to offer bogus software with unrealistic monthly returns.
Nonetheless, what a realistic monthly return in algo trading? To answer this question, there is a need first to shed light on some concepts. First, you need to understand what algo trading is all about. Secondly, you need a good idea about the level of risk that the algo trading system is exposed to. With this in mind, it is possible to talk about realistic monthly returns.
What is algo trading?
Algorithmic trading or algo, for short, is the case where a trader employs a computer to carry out trading decisions on his behalf. The algorithms that make the trading decisions are simply a set of instructions that tell the trading software what to do and at what time. Since the software strictly follows guidelines, it has the potential to earn astronomic returns. Unlike human traders, algorithms are not susceptible to psychological factors.
The ultimate manifestation of algorithmic trading is the forex robot. This software can stay active in the market for as long as possible. Today, traders are utilizing VPS for forex so that their bots can run trades even for a year without stopping. A virtual private server (VPS) acts as a virtual replica of your computer. Therefore, you can have the VPS run your FX expert advisors, and your only task will be to adjust the parameters in the forex EA.
The risk profile of algo trading systems
Algorithms trade a super-high frequency. If the market is saturated with algos, they can create humongous levels of volatility. The excessive volatility hampers the liquidity of the market. As a result, the algorithms may begin to enter and exit wrong positions hence leading to a loss of money. Before such a scenario happens, some algorithms can rake in returns in the order of 50% per month. However, this continues to reduce, to the extent of loss-making as more algo activity hampers the liquidity in the market.
Algorithms sometimes get faulty. In case this happens, and you fail to realize early, the system can blow your account in seconds. Therefore, you should ensure that your algo trading system is free of faults to ensure that you earn a reasonable return in a month. Nonetheless, other factors are out of your control. For example, in a roiled global market, a slowdown in one market could wreak havoc in another market at the other end of the world. It is because algorithms are highly integrated into the global forex market.
So, is a 10% monthly realistic?
From the foregoing, it is apparent that the monthly return from algo trading hugely varies due to many moving parts. Besides, different traders have different experiences with the algorithms that they use. Scrolling through the many professional trading forums on the internet, you will notice traders who claim to earn a consistent return of between 16% and 20%. Others claim to make monthly returns of over 80%. However, it isn’t very easy to establish the authenticity of such claims.
From a realistic point of view, a 10% monthly return is possible. The first step towards such returns is to cap your expectations in the realistic zone. Usually, unrealistic expectations have a significant impact on your trading behavior, even when using robots.If a bot fails to give you the returns you expect, you are highly likely to pull it down.
The thing is, you should never leave your automated forex trading system unattended. Always be on hand to adjust the algorithms based on the happenings in the global markets. Say, for instance, that you wake up today, and the British Pound has spiked because of a trade deal with the US. It happens that when you were configuring the trading system, you anticipated the GBP to decline because of Brexit complications. In such a case, you should readjust the parameters of the algo trading system for it to exploit the spiking GBP.
Algo trading is a prominent feature of the forex market today because of its reliability. However, it would help if you always stayed vigilant against vendors who offer bogus software to exploit unsuspecting traders. Such people make traders lose faith in the usefulness of algo trading. Ultimately, backtest any algo trading system to ensure it can earn the purported returns before buying.