To be invisible to a FOREX broker, a trader can only deal in market orders – orders that execute immediately at the current bid-ask spread. Unfortunately, such a strategy is extraordinarily risky, due to slippage, wide spreads, and lack of a stop-loss. A trading robot – automated trading software – can keep a trader invisible and address most of these problems. Anonymity is only an issue with dealing-desk brokers; this type of broker trades against its clients.
Market and Limit Orders
A market order can be placed any time. A dealing-desk broker decides the current bid and ask prices; a quote away from the last displayed bid/ask spread is called slippage and it can cost a trader extra money. A dealing-desk can raise ask prices and lower bid prices in response to a market order and pocket the difference. In response, a trader may choose to use a limit order, which specifies the maximum ask or minimum bid acceptable. A limit orders tip off brokers in advance of a trader’s intentions, once again inviting price manipulation by a dealing-desk.
A stop is a form of limit order that closes out an existing position when prices hit a specified level. A trader uses a stop-loss order to close a position at a maximum acceptable loss and a take-profit stop to close out a profitable position at the minimum acceptable gain. Stops are important because they impose a money management discipline upon traders. They also broadcast to a dealing desk how much to manipulate prices in order to trigger a stop loss or avoid a take-profit stop.
FOREX robots are software programs that submit online trading orders. They have grown in sophistication over time, and the best can be programmed to automatically execute one or more trading strategies. As real-time programs, robots can instantly respond to a large volume of price data, well beyond the abilities of human traders. If carefully prepared and monitored, FOREX robots give traders a number of advantages.
Robot software can be programmed to place a market order the instant a specified bid or ask price is reached. This type of order is subject to less manipulation since it follows on the heels of an announced bid or ask price, whereas an untimed market order may allow a dealer to slip prices to its advantage. A timed order placed by the robot could represent position entry or a stop. In effect, the robot substitutes a timed market order for limit order, removing an opportunity for dealing-desk mischief.
Non-Dealing Desk (NDD) Brokers
If you feel the need to disguise your trades from your broker, you need a new broker. You don’t have to worry about keeping your intentions secret from a NDD broker, as this type of broker does not trade against clients – it makes money from commissions and spreads instead. NDD brokers are superior to dealing desks in that they offer real-time executions in the actual interbank market with tight spreads. Dealing desks operate in a shadow market of their own creation and feature delayed fills and wide spreads.
FOREX trading can be emotionally stressful. Traders are typically torn between fear and greed. When a trader’s emotions become too strong, they can subvert the discipline needed to stick to a trading strategy. Often, panic selling can be an opportunity to buy a currency inexpensively, but it takes intestinal fortitude to stand up against the crowd and buy something that everyone else is selling. Robots have no such problems and may benefit you during an emotional trading period.