Trading with an Expert Advisor. – Analytics & Forecasts – 19 April 2023

Introduction.

At first I wanted to write an article but my article was deemed worthless, so I decided to publish it as a blog.

This article aims to put forward my knowledge about trading with Expert Advisors. I would like to make it clear that everything that follows is my view and experience, I am not responsible for any of your future decisions.

Trading is a medium made easy to access to the public, today it is very easy to create a trading account, make a deposit and start trading. We don’t know it or tend to say we are different, but 95% of new traders will lose their entire investment capital, the other 5% will take losses, train, persevere and finally understand trading and its true nature. Still today too many traders think that it is a game and that it should not be complicated to make profits and make ends meet. There are people who really think that they can get rich from trading.

However, we must not forget that before all that it is a profession that studies exist to join trading organisations, each step is dissected by profession, so a trading organisation may have 4 to 5 people who will manage the opening for a single position. There will be one person who will identify the potential, one person who will evaluate the risk of the position, one person who will estimate the risk taken in relation to the capital (money management) and one person or team who will follow the position throughout its existence.

You may notice that at no time will we talk about the gains, it is always a question of measuring the risk. You will have noticed and probably experienced, but before you can become a seasoned trader it takes a lot of time and investment in training. Fortunately, there is an alternative to all this that allows several advantages, it is algorithmic trading. On Metatrader this is called Expert Advisor or commonly known as EA. However, it’s easy to think that all you have to do is activate an Expert Advisor on a trading terminal and you’re rich. By the end of this article, you will know how an Expert Advisor works, how to analyse it properly and how to make the right decision for your needs.

Expert Advisor.

Commonly called EA, it will allow to open and close positions automatically following strict rules. In general, Expert Advisors are placed on VPSs, which allows them to work 24 hours a day, 7 days a week, without ever stopping. That’s what an Expert Advisor is, he acts like a trader, but faster and not at all emotionally.

Several arguments make the Expert Advisor an essential trading tools today:

• Time saving.
• Emotional neutrality.
• Respect for the rules of money management.
• Regularity.

However, there are limiting factors that make the Expert advisor a trading tool rejected by some investors:

• The need for knowledge.
• The need for regular monitoring.
• The lack of transparency.
• The lack of flexibility.

Trading.

As you may have understood, automation with an Expert Advisor is governed by the same rules as a trader who does it manually, both evolve in the same environment. It is therefore important to understand that what can be risky for one is also risky for the other. I’m talking about dynamic changes, the news on a currency that sometimes makes records of volatility.

Trading systems that are therefore by definition dangerous for a manual trading system will also be dangerous because it is executed by an Expert Advisor, often the lack of emotional trace or the lack of flexibility are lacking Expert Advisor on trading systems recognised as dangerous. This is how two dangerous trading systems are recognised, the Martingale and the Grid. These systems do not take into account a concept that is too often neglected, the currency management. Obviously, to do this a Stop Loss (SL) is mandatory as well as a Take Profit (TP).

I like to compare all statistics in trading with a Balance and Equilibrium system, if you adjust one statistic it is mandatory another statistic will move accordingly in proportional ways, I will make this comparison later with very simple examples.

I would also like to say that you should never invest money that you cannot afford to lose! Consider any money invested in trading as definitely lost and therefore you should be able to support yourself and your family without it. You can hope one day to withdraw this money slowly in general we withdraw 1% maximum of the capital per month … So you will have understood if you really want to withdraw a lot each month you need a large capital, because you will have to make an effort to earn 1% minimum each month and this already requires a good effort, but the more you have to withdraw each month a high percentage the more the effort to provide is important, the more you provide important effort the more the risk of losing everything happens … That’s why trading with small amounts of money is so risky, because you have to pay back the VPS before you can buy or rent the Expert Advisor. This can take several months of trading.

The Marketplace.

Mql5 offers an easy connection to all Expert Advisor sellers. It is important to know that the seller accepts a payment to put his Expert Advisor online and that Mql5 takes a position that discharges itself of any responsibility, I find it important to say this, because I see a lot of disappointed buyers, because the product does not meet their expectations.

The seller when he makes his products available is in agreement with the following: (I just copied and pasted). Here is the link to the rules: https://www.mql5.com/en/market/rules (I invite you to take the time to really read it!).

We agree that a lot of sellers do not respect these conditions, because even just putting the results of a backtest compromises the agreement. But nowadays buyers “need” to see a curve, results, in short they need to have their mouths watered… Of course the sellers could remove these screenshots showing the backtest, but it will be immediately disadvantaged by the competition that displays these results. What you need to understand is that it is impossible to guarantee profits. That’s why Metaquote asks that the products do not guarantee any results and that they themselves are rightly cleared of any commitment!

To avoid any misunderstanding, Metaquote has allowed all products to be tested with demo versions and that is enough! We will see below that the tests that can be carried out offer many possibilities to understand the Expert Advisor and thus make the right decision in relation to our needs. On top of that, Metaquote tests each Expert Advisor before it is put online! But what is tested? Quite simply, the proper functioning and compliance with the conditions of the trading account, in fact, it is tested that the Expert Advisor opens and closes positions, but also that the Expert Advisor respects the margin, leverage and other conditions of the trading account. Thus a buyer is guaranteed that the primary function of the Expert Advisor is respected and that the Expert Advisor respects your broker.

Please note that the following is my opinion and I know that some people will feel targeted. It is a market that is to say that we respond to supply and demand, the demand is the buyers and today too many new think that we can become rich and earn a lot which is false trading, our goal is to do better than the banks that’s all … Example 2% increase per month is already huge! So sellers will naturally want their product to sell and therefore reach as many buyers as possible by proposing Expert Advisors adjusted to historical data showing a strong gain unattainable in real life! is where people complain that the Expert Advisor does not meet their expectations, except that if you have read the rules as I said above you will have read the part that says:

You will have understood that you have taken the wrong decision on your own and indeed many indicators show that the Expert Advisor in question does not meet your expectations, we will see later all the possibilities to test the Expert Advisor and better find the one or those that match your profile.

What you also need to understand, and I’ve been around long enough to see that what I’m about to tell you is recurrent! The seller posts an Expert Advisor that seems to make your wildest dreams come true after many weeks of intense effort on the part of the author, unfortunately the negative reviews multiply and after a while you see the product being hidden by the author and the whole profile of the author is deleted, nothing appears from these old posts. The author is left with his earnings, because a product that has attracted a lot of buyers in a few weeks can collect a nice sum of money. After some time this same author comes back with a very similar product, but updated and the cycle starts again, all the former buyers are gone, or almost we can say 95% so not many people are present to witness the old disaster … This is how some salesmen that I call not very responsible and with an absolute lack of ethics live trading by selling Experts Advisor.

Strategy systems.

So here we go, I’m going to present different trading systems and explain to you what to watch out for.

We start with the martingale, the martingale is also used in several other areas, it consists of doubling the previous bet every time you lose. I know that it is understood by all and yet I really prefer to talk about it, because it seems impossible one day to lose all the capital, because the probability of having several losing streaks seems non-existent, however, mathematically speaking a losing streak exists and the probability for this losing streak to happen one day is 100% it’s mathematical! I am not going to develop the calculation of probability, but it is important that you know it. Yes, some people will say that Expert Advisor stops the losing streaks after xx% loss, OK that doesn’t change anything, because the probability of arriving at a losing streak of xx% is higher than that of 100% loss, the process of losing the whole account will simply be longer…

The grid, much less known than the martingale, is just as dangerous, because a grid system will open several positions at key intervals programmed by the author according to his strategy system. The multiple opening of positions increases the open volumes which is similar to a martingale, the dangerous side is that all positions have the same take profit, it is the sum of the open positions that allows the only profit it is important to understand, because it is an important difference compared to another strategy that I will present later the Hedging So this strategy often expects the market to turn around to recover the profit of all the positions, this system is too often absent from any Stop Loss like the Martingale. Here too it is likely that a significant market reversal will be executed one day allowing closing with a profit of all positions, so one day or another the trading account will encounter the probability of liquidating all capital.

Unfortunately, some author decided to cumulate the Martingale and Grid Strategies, which from a probability level allows indeed to win in the long run, but the probability of reducing your capital to 0 is still present with the Grid and Martingale system the risk of destroying your account is present you understood it, but the speed to destroy an account is also fast, it is possible that you don’t have the time to intervene to avoid the total loss. By coupling Martingale and Grid the probability is lower, but still existing, but also the loss of the account is even faster! Sometimes 1 single candle is enough to destroy your account …

Hedging, often accused of being a dangerous technique, in reality it is not, but this is often because it takes a hedging account to make a grid system and that’s when people associate the hedging strategy as dangerous while the Hedging strategy has nothing to do with a grid system, the difference is subtle and I will explain it. As mentioned above a grid system opens several positions and all these positions have a common Take Profit! For example, if you have a strategy that is done on the bottom trend, you can enter the purchase for a position that will be open for several days and during this uptrend of bottom it is possible that opportunities of sale punctual arise and you will therefore open new position of sales has very short duration to try to draw a maximum profit during a downtrend of a few hours, your position in the purchase remains open if no contraindication tells him to close. This is what hedging is all about and as you can see it’s like having several strategies in one Expert Advisor. Only trading accounts that allow simultaneous opening of the opposite of the first one are called Hedging trading accounts and since a hedging account is required for the dangerous grid system the hedging strategy is associated with a danger when it is not. Hedging is not dangerous because each position is independent with a risk specific to each position and not to the whole position like the grid.

Another important thing is the Risk Reward commonly called RR, but what is it? It is simply the risk taken to win. Only the win rate is impacted by this Risk Reward, the lower the Risk Reward the higher the Winrate you should have and the higher the Risk Reward the lower the Winrate you can have. It is a link between these two components that will allow you to make a profit. To measure the Risk Reward many will simply measure the SL and the TP and get the Risk Reward, but the Trailing Stop and Break Event and other strategies distort this Risk Reward calculation. A more reliable way to get the Risk Reward of an Expert Advisort is to take the average gain and divide it by the average loss. It is better to have a Risk Reward higher than 1, to illustrate I will let you imagine which situation you prefer.

You risk losing $5 to win $2, but you have an 80% chance of winning.
You risk losing $5 to win $8, but you have a 20% chance of winning.

The gain after 100 trades is the same, it seems obvious to you that you prefer to win more often and tell yourself that $5 is nothing, but what is this $5 compared to the trading capital? If you have $1,000 it represents a normal risk of 0.5% late, but if you have $100 it’s 5% which is, in my opinion, the limit not to exceed, because it becomes important! Now some say OK I will risk 10% or 20%! This is unfortunately what we see on some Expert Advisors recommended by the author. Can you imagine having a lot of capital and risking 10% for a position? 100 000$ you risk 10% or 10 000$ ? Moreover with a low Risk Reward ? Let’s take a Risk Reward of 0.5 (believe me very few Expert Advisors offer a Risk Reward higher than 0.5 …) you would then risk losing $10,000 to gain $5,000 ? This becomes immediately less attractive, we prefer to risk $5,000 to try to win $10,000, but for that you need a Risk Reward equal to 2, but also to risk 5% of the capital, obviously the win rate drops, but ask yourself the question when you see an Expert Advisor with a high win rate it is likely that the Risk Reward is low.

The currency management is the most important thing, all professional traders use a currency management scrupulously respected then the Expert Advisor must also have a currency management there are several currency management, but I will retain 6 I do not go into detail there are others, but I let you do research:

• Fixed batch
• Fixed fraction
• Fixed ratio
• % of risk
• % of volatility
• The optimal F

If you do the research you will find that except for the fixed lot all varies according to a measured risk, for me it is not considered management money to take the capital divided by 1,000 and multiplied by a lot size 0.01 … It is not a management currency, we do not calculate the risk here.

It is possible for Expert Advisors to take into account the news to take or not take a position, because it is well known that volatility is important during certain news. So some Expert Advisors will be inactive during news while others will take advantage of the volatility to place one or more positions.

Good practices.

I think that in our schooling we all had history to study, I confess that I am not a fan of history, because it is always full of events and important dates to remember and I did not have a good memory to remember the dates, but I remember that they always say that it is important to know the past to avoid repeating the same mistakes. Why should it be any different in trading? When we do a test I find it important to do it in the longest period possible! because during this period events have taken place and the Expert Advisor MUST be able to know all the past events in order to survive similar events in the future, so it sounds logical and it is!

Many people will say that the markets are constantly evolving and that past data is not complete or other arguments that will make it easier to set up an Expert Advisor who does not know how to survive the past or who does not have the desired behaviour. I concede that it is indeed logical to discard certain movements for example USDCHF on January 15, 2015, we can write this date in hard in the code to avoid the important drop that took place on this day following an expected news, but it is not excusable to skip a long period or to ignore the past!

That’s why you have to test in all the period you have, if you want to have a good quality of Backtest there are very good quality data sources like Dukascopy. You can see that when the Expert Advisor leaves the comfort zone provided by the author, the behaviour is no longer as expected! The Expert Advisor is surely over optimised and it proves it is not adapted to the changing market conditions, because in the past these movements were far from the stability promised by the author.

Do not use dangerous systems with a martingale or a grid. For me it is not debatable, these systems have proven in the past that they are not made for duration.

A Risk Reward higher than 1, I find it difficult to say to myself that I risk big to win small, I prefer to risk small to win big…

Obviously, a good and real money management is generally the key that makes the difference between a stable or not stable Expert Advisor, I invite you to learn more about this subject.

For me it is not debatable that an Expert Advisor requires a broker and a well-defined VPS to work properly as the author says! This is nonsense, you must use the broker that suits you with the VPS that suits you. Otherwise the Expert Advisor is far too sensitive to change and after a long quest to find a broker with a top-performing VPS the market conditions will change and you will still have to start the eternal quest for the broker with the best VPS according to the mail servers…

Learn to read a Backtest, once finished you have several statistics that are present and some of them allows you to quickly identify if the Expert Advisor is for you. For example, the Profit Ratio if you do the research on the internet you will learn that it must be greater than 1, but also that it should not exceed 4! Otherwise the Expert Advisor is considered too ambitious to use in real life. You can use this page which describes the visible statistics, it is up to you to do the necessary additional research: https://www.metatrader5.com/en/terminal/help/algotrading/testing_report

Conclusion.

If you follow the good practices, you will already avoid many disappointments, however, if you still want to use dangerous systems I advise you to quickly withdraw your deposit so that the trading capital is only on profits, so you will not risk your money.