Most traders at some point in their career will experiment with a systems based approach. Some will decide to stick with it while others may find that a discretionary method suits their personality better. Forex expert advisors, or EA’s as they are commonly referred to, offer a hands-off approach to trading the Forex market using a trading system. Our aim here is to highlight the main advantages of using a Forex EA and point out some disadvantages as well.
What is a Forex Expert Advisor?
Forex expert advisors are essentially a specific type of trading software with preprogrammed rules for initiating, managing and exiting trades in the market. So in short, they can be classified as automated trading systems. However, Forex expert advisors are coded in the Metaquotes programming language, MQL, and EA’s run on a very specific trading platform. That is the well-known Metatrader 4 or 5 platform.
Some traders prefer to convert their existing discretionary strategy into a Metatrader expert advisor, while other traders may opt to purchase a prebuilt MT4 expert advisor from a trading systems developer. The purpose of this article is not to advocate building your own EA versus purchasing an off-the-shelf trading system. That decision needs to be left to each individual trader interested in systems trading. Instead what we will focus on for our purposes here is to provide a general overview of some of the benefits of using Forex expert advisors, and also reveal some of the challenges and pitfalls when employing these EA’s in the market.
Pros for using a Forex expert advisor:
Helps Maintain Discipline
It’s often said that trading is simple but not easy. The reason for this is that the way that our brains are wired is in direct conflict to achieving optimal results in the market. Most times, those choices that feel the most comfortable in the market, are the very ones that tend to get us in trouble. And conversely, those choices that feel gut wrenching, are the very ones that tend to provide for the best, most profitable trading opportunities.
Maintaining disciple is particularly difficult for discretionary traders who are at the constant whim of their emotions as they engage with market forces. Those traders, on the other hand, that have taken the time and effort to create a rule-based trading methodology which can be converted into a Metatrader 4 expert advisor system, can preserve more discipline around their trading.
This inherent advantage comes from putting your full faith in the trading system, which will follow your programmed commands, without fail or second thought. This type of robotic interaction is the epitome of disciplined execution in the market. This is an area where computerized expert advisor trading systems shine.
Faster Order Execution
Regardless of whether you consider yourself a scalper, a day trader, swing trader, or position trader, it is of utmost importance to ensure that you are reacting quickly to trade setups and executing your trades in the most efficient manner possible. This becomes increasingly important as your trading timeframe decreases. For example, a loss in profit potential of a few pips can make a drastic difference on a trade for a scalper compared to a long-term position trader.
Therefore, short-term traders must make every attempt to reduce latency and slippage. A well-designed forex expert advisor can identify potential set ups much faster than a human can with just the naked eye. Additionally, the execution time will be greatly enhanced through the implementation of a forex trading robot. Simply put, EA’s react to trade situations in a speedier manner than can ever be expected from a human trader. This effect is enhanced if you are trading with an ECN forex broker whose infrastructure is built around optimal execution.
Reduced Time Commitment
There are only so many hours in a day that a discretionary trader can commit to the market. Typically they will devote a certain allotment of time that both fits their work and life schedule. This can limit the number of opportunities available to discretionary traders. Keep in mind that the Forex market is a 24 hour market, and opportunities can arise at any hour of the day.
Deploying a Forex expert advisor can maximize efficiency and reduce the time needed to monitor the markets. Once the development time for creating an expert advisor has been completed, the ongoing monitoring of your rule-based trading system can be quite minimal. This reduced time commitment coupled with the ability to take advantage of round-the-clock trade opportunities can add to the appeal of utilizing an EA based trading approach.
Promotes Work Life Balance
There needs to be a balance between the time you spend on market activities and other work and family related commitments. When this balance exists, it will allow you to trade in a clear focused manner, while taking care of other responsibilities in your life.
A profitable expert advisor can help you to trade the markets while holding down a full-time job. This can also be accomplished if you are discretionary trader, however, it becomes much more difficult if you are more focused on short-term trading time frames. Generally speaking, for discretionary traders, the shorter your trading timeframe, the longer you will need to stay glued to your computer screen during the trading session.
This is not an issue for short-term systems traders, because EA’s can handle any reasonable number of trades during the trading day without additional effort or time. This leaves more opportunities for an automated EA trader to engage in other hobbies and interests that they may have.
Whether we realize it or not, emotions can play a large part in our decision process in the financial markets. We like to think that when we are trading the markets, that we have complete control over our senses, and that we will act in a manner that is consistent with preservation and growth of our capital. However, we know from research that this is simply not the case in most instances.
The effects of fear and greed in the market can be enormous and weigh heavily on our decision process. So we need to do whatever we can so as to try to tame those negative emotions. And one of the ways that this can be accomplished is by deploying an expert advisor trading system in the market. EA’s perform their function in the market without any emotional barriers.
They are simply programmed to follow and execute a predefined set of rules, and that’s exactly what they do. As such, a major advantage in utilizing expert advisors is that they will help prevent us from falling into the trap of relying too much on our feelings rather than just focusing on the trade situation in an unbiased manner.
Makes Backtesting Easier
Every trader should become familiar with the overall metrics of their trading strategy. This includes various performance metrics such as win percentage, average win to average loss, maximum drawdown, number of consecutive wins, number of consecutive losses, trade expectancy, profit factor and more. Only when you have a good sense for these important metrics will you be able to consistently stick to the trading strategy.
One of the best ways to arrive at these metrics is by performing a backtest. Backtesting can be quite cumbersome for traders that trade manually. However, for the system trader, backtesting can often be a breeze. Metatrader has a robust back testing engine that can perform a back test of your trade strategy relatively quickly. You are only limited to the amount of historical data that you have available for running the back test. Additionally, once the back test has been performed, you can run various optimization tests as well in an effort to enhance the performance of the expert advisor.
Cons for using a Forex Expert Advisor:
Black Box Systems
Unless you are creating your own expert advisor in mt4 from scratch, you will find that the vast majority of forex expert advisors withhold the trade logic of the system. This is often referred to as a black box trading system. A major problem with trading black box trading systems is that the moment that the system has a drawdown, it becomes very hard to stick with the system.
Obviously, whether you are discretionary or systems trader, and regardless of whether you know the trading rules are not, you can fall victim to this tendency. However, it’s much more pronounced when you are using a black box EA system. This is because when you are blind to the rules of the system, you come to question the systems integrity much more than if you are intimately familiar with the rules that go into the methodology.
This is one of the reasons why traders often lose money with profitable, time-tested Forex EAs. This is to say that eventually a trader become uncomfortable with the uncertainty inherent with a black box system, and finds it impossible to follow during a losing streak.
Over-Optimized Performance Results
Data is an integral aspect of the trading business. And traders rely on historical data in order to back test their trading methodologies. However this can sometimes be a double-edged sword. That is to say that if you torture a data set long enough, you can eventually come up with whatever results you want. And so, if you’re developing your own expert advisor, it’s important to take necessary steps to ensure that you’re not over optimizing the system. Because if you are not careful, you will create a system that looks great on paper, but, one that will likely fail when trading in real time in the future. So, do keep that in mind, if you are looking to build your own expert advisor.
Those individuals who are seeking to buy an expert advisor from a system developer or an expert advisor programming services company need to do the proper due diligence to ensure that the performance results provided have not been excessively curve fit.
This can sometimes be a challenge prior to making a purchase of any expert advisor from the system vendor, however, every effort should be made in this regard. One practical recommendation would be to forward test the EA strategy in demo mode before committing real capital to it in the market.
Limited To A Single Instrument
Typically, you would enable an expert advisor by attaching it to a specific chart within the Metatrader platform. By doing so, the EA will execute trading orders on that particular currency pair.
Though there are some EA’s that can handle multiple currency pairs, most are designed to trade a single currency pair at any one time. This can limit your exposure to opportunities in the market. Along with that, you will be giving up a certain amount of diversification that you could enjoy by implementing a multi-instrument trading strategy.
Trading just a single instrument can increase your overall risk exposure. For example, if you were trading just one currency pair with a total position of five mini lots allotted to the trade, an adverse price move due to unexpected news, could affect you much more than if you had the same total position size open that was allotted across a few different currency pairs.
Technical Failures Can Occur
When you’re relying on a computer-based systematic approach to trading the markets, you have to be cognizant of various technical failures that may result both within the system itself and from the related hardware components.
There can be times where you experience technical issues such as computer crashes, software updates, power outages, connection problems, and other related problems that can have a direct effect on the performance of the expert advisor.
Therefore, expert advisors need to be carefully monitored on a regular basis to ensure that there are no technical glitches in it or in your infrastructure setup. And so, you will want to monitor the internal workings of your expert advisor to ensure that orders are being routed correctly, and that the signals are being generated exactly per your original requirements. If and when you notice any abnormality related to this, you will need to act quickly in an effort to restore or revise the expert advisor code.
Additional Cost of VPS
An expert advisor works best when it is deployed from a dedicated server. Typically EA’s run on virtual private servers, VPS for optimal performance. This can reduce some of the technical challenges related to trading an expert advisor.
The benefit of a VPS comes from the ability to house and deploy your expert advisor from a stable network, which can also offer lower latency for faster execution. In addition to this, since a VPS can be accessed from any location with an Internet connection, it offers a high level of flexibility for traders that are typically on the go.
However, all of this does come at a cost. As such, those interested in forex trading with expert advisors need to take this additional cost into consideration. While the price for Virtual private servers are becoming much more affordable, the added cost may only make sense for those that have a reasonable capital base in their trading account.
Doesn’t Build Trading Skills
Those who trade the market successfully have achieved something highly sought after in the investment world. And that is the skill of financial speculation. This is a highly sought after skill and one that can build you a fortune over time. It’s only after many years of sitting in front of a computer screen watching price action that such a skill can really be acquired.
By relying on an expert advisor to trade the markets, you’re not building up your own trading skills. Most expert advisors may work for a certain period of time, and then as the market dynamics change, that very expert advisor can become obsolete.
As such, by relying too much on an expert advisor to trade on your behalf, you are setting yourself up for potential disappointment down the line. If there was a piece of code that could extract profits from the market in every type of market regime, it’s very likely that the developer wouldn’t be selling it to you.
When you take the time to understand how the markets work, and the most effective trading strategies as it relates to different market conditions, then you will have come a long way in your trading journey. Remember, there is no Holy Grail trading system in the markets, and any search for the one best forex EA will prove to be a futile attempt.
We’ve outlined some points that should be considered before deciding whether trading with a Forex expert advisor is suitable for you. There are quite a few advantages with EA trading, however, these may be overshadowed by the disadvantages. It’s a decision that you’ll need to make, but now you have a good background upon which to make that decision.
As a matter of interest, there are a few reputable sources that are engaged in the business of testing and rating commercially available trading systems. One that has a long track record is a company called Futures Truth. They however, focus primarily on trading systems that are designed to trade the futures market. Unfortunately, there is no single authoritative source that provides the service of rating top expert advisor systems designed to trade Forex. As such, additional due diligence is required when deciding on the best expert advisor suited to your requirements.