This article opens up a new series where we talk about the genesis of trading robots or Expert Advisors (EA). Trading bots are increasing in popularity in the forex world and many newcomers jump in and buy them without really knowing what they're doing. This article series will hopefully enlighten you as to what they're all about, what to look for and how to avoid the various pitfalls.
In this first article, we'll cover what a trading robot actually is, the reasons for using a trading robot, whether or not they really work, potential problems that can be struck, and where to start.
What is a trading robot or Expert Advisors?
A trading robot is a software program that automates the process of trading. The program runs on your trading platform analyzing the charts and executing trades as needed. The general theory is that the software program executes a particular trading strategy or a number of strategies by following a set of rules. The rules may be very similar to the rules you follow when you trade manually. For instance, the software program might look at moving averages, it might look at breaks of a support or resistance level, it might look at price action and momentum in order to make a decision to trade. The software can then execute the trade, setting and adjusting stops and targets, and closing the trade at the appropriate time. Sounds like a Holy Grail? Not necessarily ... read on ...
Why develop or use a trading robot?
Many people jump in to use a trading robot solely from the promise of unlimited riches from the EAs vendors. This is not a good reason - beware of anyone that promises unlimited riches from any strategy, method or robot. If riches were that easy, they wouldn't be selling the software in the first place.
Some better reasons for using a forex robot include:
- To eliminate the need to make trading decisions. The robot has the trading rules programmed into it and it makes the decisions for you. If you have trouble focusing on the markets, making decisions, pulling the trigger - perhaps a robot can help there.
- To avoid the need for forex trading discipline. Let's face it - many traders fail because their emotions get in the way. Fear and greed drive us to make poor trading decisions and to stray from our rules. An EA takes all the emotion away - the machine just takes the trades based on the rules it is given.
- To avoid having to sit in front of a screen for hours on end every day. A trading robot can be ready to take and manage a trade every minute of every session, freeing up your valuable time.
- To provide trading expertise that you might be lacking. Good robots are developed by real traders who know how to develop and execute winning strategies. Their knowledge and experience can be captured and crystallized into the logic of a computer program which you can then utilize.
- To make money! This really is the bottom line. You want a program that can help you build steady profits over a period of time.
Do they really work?
The developers and vendors of the various EAs out there will, of course, tell you that they work and they have the best forex EA in the world. On the other hand, there are many trading veterans who swear that only discretionary trading (as opposed to mechanical trading) can be successful in the long term. I believe that automated trading systems can and do work if properly designed and managed. Let's face it, there are hundreds of forex mentors out there who are publishing and teaching their trading strategies. Many of them are profitable and many are "mechanical" in the way they are defined - that is, there is no discretion on the part of the trader required.
Some other points to keep in mind:
Be careful of scammers. Unfortunately, a large proportion of EA vendors is just there to fill their own pockets by feeding off the vulnerability of traders wishing to make easy bucks. The forex trading market is growing rapidly and many traders are looking for shortcuts to riches. It's an easy sell for the sharks who can whip up a web page with big red headings and text longer than your arm, professing the extravagant lifestyle you could be living if you used their EA.
Don't expect extraordinary results. Extraordinary results generally mean extraordinary risk. It may work well for a while but it's just as easy to come undone in a big way.
Make sure the EA can run when it needs to. If the EA is designed to run 24/7, then make sure you have a computer available which can run 24/7 with a robust internet connection. A hosted EA service is one way that this can be achieved.
Make sure the EA is properly updated and maintained. Market conditions can change in the short term and the long term - that's a fact. Try to find an EA that can be updated or modified as market conditions change.
The better EAs will mimic the way a real trader trades - that includes using good money management techniques.
Look for EAs that have real back tested and forward tested results. Scammers will often fabricate a MetaTrader statement for their sales pages, so look instead for published live trading results which can easily be verified.
What potential problems can there be?
Where do I start? The list of potential problems in trading robots can be very long! Here's a few to look out for and keep you on your toes:
The logic behind commercial EAs is often hidden - you have no idea how they work and it's not likely to be disclosed in a hurry. This is sometimes called a "black box" because it's just something that you plug in and let run. I don't like "not knowing" how something works. If you don't know how it works then you're unlikely to know what it's going to do next and how it reacts in certain situations.
Don't be tempted to just set and forget your EA. Make sure you monitor it closely otherwise you could end up with an empty trading account in a matter of days or weeks if something goes wrong.
EAs can take the fun out of trading! This comes back to your trading goals - why ARE you a forex trader? If one of the main reasons is because you love to trade, then by all means, use a good EA but also make sure you keep your hands dirty through manual trading too.
Stops too big. Lots of EAs have small targets and very large stop losses. This is great for quoting the win -to- loss ratio, but you can end up with some huge drawdowns too.
Spreads become significant when a scalping EA is used. If the EA works by scalping the market, then you're most likely going to be limited to a select few brokers - brokers who have a very small spread. Try to find an EA that is not too dependent on the broker.
Brokers working against you. If the same EA is used by a large number of traders, then it doesn't take too long for brokers to get smart, figure out the strategy that is being used, and then use it to their own advantage. Also read Everything you need to know about brokers.
Not adapting properly to market conditions. This was addressed in the section above - try to find an EA that can be updated and maintained and that comes with real support.
Where do you start?
There's a lot to work through here, so where do you start if you want to find or develop your own EA? Firstly, you'll need to find a trading strategy that actually works, a strategy that has been proven to make profits relatively consistently over a long period of time. The strategy also has to be defined in terms that are strictly mechanical. If the strategy requires any sort of discretion on the part of the trader, or the rules become too complex - then it's going to be extremely difficult to define a software program to emulate that strategy.
You'll then need to pick a trading platform. The term EA is used by Metatrader for their trading platforms. There are other trading platforms though that have their own scripting languages which can also provide fully automated forex trading. If you're a programmer or aren't scared to try your hand at it, you can start to learn the scripting language and start developing the robot yourself. A better option is to find a programmer who is experienced in the platform scripting language that you're interested in and hire them to implement your strategy as an EA.
In the world of automated forex trading, there is plenty to learn. If you're looking to invest in an Expert Advisors, then it's wise to arm yourself with as much knowledge as possible so as to make you aware of all the potential rewards and pitfalls.
What have you learned about the genesis of a trading robot?
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