Basic Knowledge of Expert Advisors

What Is Automated Expert Advisors or Trading Robots?

Expert advisors (EAs) or day trading robots, is an automated trading program that runs on your computer and trades for you in your account.  

Since it is a program, it will only take trades with parameters that align with what is written in the program. Creating a trading program requires extensive trading knowledge, as well as programming skills.

EAs are based on a trading strategy, so the strategy needs to be simple enough to be broken down into a series of rules that can be programmed. The more complex a strategy, the harder it will be to effectively program.

For people who buy trading software, they are completely dependent on the trading skills and programming skills of the person who wrote the program. This is a vulnerable position to be in.

Like most software, it will require an update from time to time. Market conditions change, and the trading software needs to be updated with it. If the software is not updated by someone who knows what they are doing, then it is quite likely the software will have a very short shelf life of profitability (if it was profitable, to begin with). EAs that are written by and maintained by experienced traders and programmers have the best chance at maintaining profitability over the long-term.

Pros of Expert Advisors

  1. EAs remove some of the psychological pressures of trading.

  2. EAs react quicker than humans can. When a trade signal appears (to enter or exit), there is no hesitation on the part of the EA. Humans, on the other hand, may freeze or question the trade. The lightning-fast reaction time of the EA is beneficial in fast moving market conditions.

  3. Automated software can monitor far more markets than a human can. At any moment a human can only effectively monitor a few markets, but an EA can monitor hundreds. Once let loose, an EA can find opportunities in all the markets it is programmed to monitor. EAs can take advantage of more opportunities than a human can.

  4. Forces the trader to simplify a strategy down to a level where it can be programmed. This process gives traders an in-depth look at their strategy. 

  5. Automated trading is the truest test of whether a strategy is viable or not. Manual trading has too many variables, whereas a program just does what it is told (inputted parameters). Automating and testing a strategy is a good way to see if a strategy is viable under current market conditions.

  6. Once a strategy is automated, it can be easily tested in different market conditions (using current or past price data). This will reveal the weakness and strengths of the program. For example, it may perform well in trending markets, but poorly in ranging markets. This data can then be used to alter the program or to show the trader when it is appropriate to intervene and turn the program off or on.

Cons of Expert Advisors

  1. It still requires a lot of work to create and/or maintain the program.

  2. The user will still face psychological pressures, such as wanting to intervene when the program is going well (protect profits) or doing poorly (protect capital). There is also the psychological pressure of deciding when it is the right time to intervene.

  3. To create your own EAs, trading, and programming skills are both required. The trading skills are required to create the strategy that will be programmed.

  4. Since automated strategies can be easily tested, that leaves them open to over-optimization. Over-optimization is when a program is fine-tuned to create the highest profit on past price movements.  Also, since tests can be easily run, EA salespeople will often only show the periods in which the program performed very well. A test of the strategy can be performed for any period in history, so it leaves it open to a lot of tinkering with the statistics. Keep this in mind when viewing automated trading statistics. Ideally, statistics should be based on live trading and not run on simulated or backtested data.

Choose Your Broker

Your broker is the biggest trade you will make. You are depositing all your capital with them, and yet many traders don't bother to research their broker until there is a problem.

 

Common broker problems include scam brokers (typically located outside first-world countries, although scam brokers can pop up anywhere), which will make it very hard or impossible for you to withdraw your money (profits and even just the initial deposit) once you have sent it to them. Scam brokers typically don't last long and show up repeatably in forum complaints, so an online search should reveal any major problems with a broker.

 

A more subtle problem is slow quotes or your broker trading against you. Day traders need a direct access broker, where the broker's software sends the trader's order directly to the appropriate exchange. In day trading, every split-second counts, so if you place an order, you want it to get to the exchange instantly. If it doesn't, another broker that offers this will likely be able to serve you better.

 

The software is also a concern. A broker may be great, but if their software isn't good it will hard to trade on and thus not ideal.

 

Research everything you can about a broker before sending your money to them. Trade a demo account with them for months, and test out their customer service before sending them money. 

 

FIVE Steps for Finding a Great Forex Broker :

  1. Consider Your Needs - Every EA has its characteristics. For example, the EA trade a lot of orders? with a small move to take profit or stop loss? Scalping EA? ECN broker would be good for you with low spread. Otherwise, your EA may work petty fine in ECN broker but no as usual in market marker / STP.

  2. Test the Brokers account services & client platform - Just open a demo account before deposit and ask them questions by email or live chat, see how fast / how they respond to your questions.

  3. Research Reviews - Search written reviews of the broker in few discussion forums but be aware of fake reviews. Find more comments to see the positive and negative comments.

  4. Real Money Test - You should try the broker with a small amount of money first. If you intend to deposit US$10,000 you can try maybe US$500 - US$1,000 and trade with one or two weeks and see how the broker controls your orders. 

  5.  Avoid "Bonuses" - Please don't use the "bonuses" broker like 'Open a $1,000 will get $100 bonus cash.'. Free stuff/bonus is not a good thing please don't greedy with those. 

 

Back Testing / Strategy Tester

Backtesting, a simulation that seeks to estimate the future performance of an investment strategy by testing its performance in the past. It is helpful in presenting past performance but is not meant to be accurate due to the spread and slippage. Think about one question: 

 

" past performance does guarantee future returns? "

 

Just put your new EA on a demo to run for weeks and see what happen. That's the best way to test strategy.

What is Spread

The charge is the difference between the bidding price and the asking price for a trade, is called "the spread."

 

Every Forex trade involves two currencies called a "currency pair." In this example, we will use the British Pound (GBP) and the U.S. dollar (USD). At a given time, GBP may be worth 1.1532 times USD. You may believe the GBP will rise against the dollar, so you buy at the asking price. But the asking price won't be exactly 1.1532; it'll be a little more, perhaps 1.1534, which is the price you will pay for the trade. Meanwhile, the seller on the other side of the trade won't receive the full 1.1532 either; he'll get a little less, perhaps 1.530.

 

The difference between the bid and ask prices -- in this instance 0.0004 -- is the spread. That's what the specialist keeps for taking the risk and facilitating the trade.

 

Using our example above, the spread of 0.0004 British Pound (GBP) doesn't sound like much, but the larger the trade, even a small spread quickly adds up. Currency trades on the Forex typically involve larger amounts of money. As a retail trader, you may be trading only 10,000 GBP. But the average trade is much larger, around 1 million GBP. The 0.0004 spread in this average trade is 400 GBP.

 

Choose a low spread makes speed up transactions and lower the risk while having a fluctuant market.

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