Does Forex Trading Software Really Work?

Does Forex Trading Software Really Work?

Forex trading software has a noble aim: to completely automate the forex trading process. Novice Forex traders sometimes view forex trading software/tools unrealistically, to automate the money making process with an absolute degree of accuracy. Realistically, forex trading software/tools are used to either produce trading signals before you make the actual trade, or the more sophisticated programs can be set to make the trade as well.

When you are trading on the stock market, you would typically choose one or more companies and start watching their shares. You will study their financial statements. You will listen to what other traders say about their stock value – whether it’s undervalued or overvalued. But whatever you do, it is unlikely that you will ever get access to the information that can really make or break a particular company. Things like technological changes that will make their products totally obsolete.

With forex it’s different – at least theoretically. The information about factors influencing the price movements of a particular currency is readily available to everyone, especially for the major currencies. So all you have to do is study that information and make money, right?

In reality there are hundreds of different currencies. Price movements in one currency will very often result in similar price movements in another currency. To study all the factors involved will still take a lot of time and require that you have access to sophisticated charting and data analysis software. If you are a part-time trader this is not always practical.

In comes automated trading software – software that will study all the different technical indicators for a particular currency and then come up with a trading signal – telling you whether you should buy or sell that currency.

All of these software packages don’t come equal though. The really good ones will do all the analysis, arrive at a trading signal and then give you a detailed report on how it came to that recommendation. This way you will learn to understand how good trading decisions are arrived at and eventually be able to override the program with an even better trading decision of your own. The less sophisticated – and cheaper – packages will still analyze the data and very likely arrive at the same recommendation, but it won’t give you the detailed background that will enable you to understand that recommendation better.

Investors and traders who base their trading decisions on fundamental analysis will not doubt tell you that the basic principle underlying these trading recommendations is flawed: trading decisions should be made based on ‘fundamental’ or ‘real’ factors, such as inflation, interest rates and the trade balance. Many will no doubt point out the effect sudden political instability can have on the value of a currency.

Sworn supporters of technical analysis will of course explain that there’s no need to worry. The indicators will pick up when the currency reacts to any such incident and the forex trading software will in turn respond with a buy or sell signal for that currency.