In the previous article (the first in this sequel) you learned why it is so important to have a portfolio of robots. You learned how to avoid some unnecessary risks and increase your chance of winning in the Forex market.
Now it's time to get down to business: how do you go about building your portfolio of robots, and doing it the smartest way possible. I'll cover the three basic rules that can guide you in your decision of which robots to choose.
Remember, the point of a portfolio is to distribute your investment among different robots, in order to increase the chance of picking a real winner robot to work on your account, and also to limit losses in the event of a fall in a particular robot.
That's why you need to choose robots that are different from one another.
OK, at this point you may wonder why I stress this point, as each robot has its own independent strategy, so they're all different, aren't they?
Indeed different robots might have different strategies, but they can be divided into several main groups of strategies, and within each group, you will see similarities which will interfere with building a truly effective portfolio.
Let me give an example: suppose you pick three robots, all trading the EURUSD and GBPUSD currency pairs, and all are trend-following, which means they look for a trend and enter in the direction of the trend. Now suppose one morning the USD was very strong, so all robots detected a strong trend in that morning. This obviously caused all three robots to sell the EUR and GBP against the USD. Several hours later the market reversed, as it often does. Maybe there was some bad news in the US that caused the USD to stop its rally, and perhaps even start falling. All three robots, which were looking for a trend, found one and got into it - now they are all in trouble! This is not a very effective portfolio to say the least.
That's why my first rule is:
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1. Choose robots from different categories
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In the previous example, a better approach might have been to pick one robot from every category of robots. To aid you with this mission, we have divided today's most popular robots into categories in the Robot Reviews section:
http://www.4xrobots.com/robot_reviews.htm
You can also find there a brief explanation of what each category means.
Had you chosen 1-2 robots from each category, one of these would have lost some money that morning, but it is possible that the others would have gained enough to offset the loss or even end the day in profit.
Choosing from different categories is definitely a good start but it is not enough, hence the second rule:
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2. Choose robots that trade different pairs
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Usually a robot specializes in a certain currency pair or pairs. This means it gives the best results when you apply it to a specific pair, say the GBPUSD (Great Britain Pound against US Dollar).
You should diversify between pairs as much as possible. For example, if you wish to use 4 robots in your account, instead of having them all trade the EURUSD (Euro against US Dollar), you'd better have just one or two robots specializing in EURUSD, another robot in USDJPY, yet another in EURGBP, etc.
Apparently, the most popular currency pair that robots tend to specializes in is the EURUSD. This is not exactly good news for you, since you're looking to diversify between different pairs. Fortunately, you can also find many robots for the EURGBP, USDJPY, AUDUSD and other pairs.
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3. Choose robots that trade different timeframes
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When a robot analyzes a certain timeframe, such as 1-minute, 1-hour or daily chart, this means that it has a certain outlook upon which it makes trading decisions.
For example, a robot that operates on the 15-minutes timeframe will make decisions that are usually more short-term oriented. On the other hand, a robot that operates on the Daily (D1) timeframe usually puts more emphasis on the "big picture" and larger trends.
Therefore, it's a good idea to choose some robots that use shorter-term timeframes, along with robots that use longer-term timeframes.
In conclusion, this article explained the 3 rules of robot selection for portfolios. In the next and last article on the subject, How to run a Forex Portfolio , I'll instruct you on how to get the portfolio up and running.
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