With the growth of online trading, forex robots or expert advisors(ea) have emerged as the most sought after trading application in the market. An Expert Advisor (EA) is an automated trading system written in MQL4 programming language and designed to operate on the MT4 platform. It uses inputs from the developer to make these automatic trading decisions. You can find some of the best forex eas provided by various developers with varying degrees of success.
Many traders, however, prefer to create their own forex expert advisors instead. There are many tools and programs available to help them achieve this feat. However, newcomers in this area have to consider 4 aspects of EAs that will ensure that they will be efficient in the real-time market.
1. Using broker historical data
When traders and programmers create forex robots, they usually test them using historical data from a reliable broker. Creating and testing Forex robots on the historical data from the same broker account where it will actually be trading increases your chances of finding a winning trade. Different brokers have different price feeds and spreads and for this reason live trading results and backtest results are usually different at different brokers.
2. Conducting a robustness test
The robustness test is basically a stress test for Expert Advisors. Every EA must pass at least one test to have higher chances of winning and withstanding market movements for longer periods of time. The more tests an EA passes, the higher chances of it being successful. Robustness tests involve repeating a backtest of the same strategy many times where each test is slightly different. For instance, if you test a strategy 100 times and each time history price data was randomly changed by 20%, it shows that the EA is ready for market use.
3. Conducting detailed demo testing
There is a reason why brokers these days offer free demo accounts. It can give users a feel about the broker’s platform before they invest any real money. It can also serve as a perfect tool to test your EA after you’ve run it for the first time. Any mistakes or losses that you might experience are risk-free as you’re aren’t putting your money on the line.
4. Reducing trade size during drawdown
It is advised for traders to cut the size of their trade to improve the EA if it experiences a drawdown. Before doing this, you need to know the ability of the forex robot in question and what you can expect from it. If you find that the risk management strategy your EA uses can recover quickly, there is no need to cut the trade size.
Drawdown and its relationship with Forex Expert Advisors
Drawdowns refer to the loss that a trader experiences from the peak (or high-water mark) to the trough in the cumulative return to a trading strategy. The Expert Advisors that you choose or create must have a low drawdown ratio, which is typically less than 20%. There are two types of drawdowns to consider here – Maximal and Absolute drawdown.
Absolute drawdown refers to the difference between the minimal point below the deposit level and the initial deposit. It gives traders an idea about how large your loss can become compared to the initial deposit. According to this metric, if it’s zero then the trading capital isn’t at risk.
Maximal drawdown refers to the maximum difference between the local extremum and the next local minimum extremum in the chart. It is not advised to trade with EAs with maximal drawdown at levels higher than 25% of the net profit.
Forex robots or expert advisors have become common in marketplaces for trading tools. However, it becomes confusing from a trader’s point of view while selecting EAs. This is why it is always advised to buy forex EAs from appropriate developers of marketplaces like the one provided by MetaTrader.