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A Guide to Expert Advisors – The Dos and The Don’ts

A brief guide to using Expert Advisors. Know their pros and cons. Learn techniques to make the most of EAs.

Disclaimer: This article is an educational guide to CFD trading and the financial markets and should not be considered as advice. Trading CFDs is high risk. Always ensure you understand the potential risks and rewards associated with trading before you trade.

 

Expert Advisors (EAs) not only prevent emotions from interfering in your trading decisions, but also present a much larger number of opportunities than you can do manually. Leaving your trades to be managed by a bot may seem challenging or liberating, depending on your comfort with using software. Here’s a guide to understanding the pros and cons of using EAs and the best practices to leverage these AI-driven trading assistants.

 

1. How are EAs Developed?

Traders who follow a process to make trading decisions may request coders who know MQL (Meta Quote Language) to automate their trading strategy. Once developed and tested, these traders can choose to share their expert advisors with others for a onetime cost or subscription-based fee. Some are also available for free.

Did you know?

Traders with programming knowledge often develop their own automated expert advisors.

2. Pros of Using Expert Advisors

There are several advantages of using EAs:

A. Increase Trading Discipline and Eliminate Emotions

EAs make decisions based on logic. They adhere to the chosen trading strategy with defined parameters and risk settings. Using them can prevent you from making trading decisions based on fear, greed or gut feelings. As long as you are confident, you can rely on your chosen EA to be a crucial part of your strategy.

B. Speed Up Order Execution

Whether it is scalping, day trading, swing trading, or position trading, timing is everything to make the most of every opportunity that the financial markets present. EAs react much faster than you can to trade setups and market conditions. EAs are used extensively by scalpers, as this strategy is based on placing several small trades.

C. Reduce Time Commitments

If you can commit only a limited number of hours to trading, EAs may work well for you. EAs can work 24 hours a day and relieve you from having to stare at your screen all day. This is helpful in markets such as forex and crypto, which are open around the clock. Also, EAs don’t get tired or burnt out after making quick and difficult decisions.

All you need to do is monitor your trades to ensure you can exit if a sudden event occurs. EAs help improve your work-life balance and keep stress at bay.

D. Facilitate Backtesting

Backtesting is very important in trading, helping you understand the overall metric of your trading strategy. These may include win percentage, win-to-loss ratio, maximum drawdown, number of consecutive wins or losses, trade expectancy, and many more. Manually gathering all this data may take hours or even days. Further, there are also chances of human biases creeping in or mixing the strategy with the test sample.

Allowing trading bots to execute your strategy on the backtest sample expedites the process. EAs can be run through optimisers, improving their performance without any time or effort invested by you.

3. Cons of Using Expert Advisors

It’s important to understand the downside of EAs before making the decision to use them:

A. Vulnerable to Technical Failures

Being dependent on technology, EAs may miss out on important opportunities due to system crashes or power failures. Software updates may also cause delays and make retesting the EA essential before using it in live markets.

B. Cost of VPS

Although a virtual private server is not absolutely necessary, it improves the performance of the EA. This, however, comes at an additional cost as the dedicated trading server is maintained by the VPS provider at their site.

C. Black Boxing

Most traders purchase EAs, which means they are using bots that are neither developed by them nor based on their strategy. They may not know exactly how it works. This creates a black box effect, when you may be left wondering what failed in case of a drawdown. This lack of clarity makes it difficult to stick to the trading system.

Did you know?

Black boxing also makes it difficult for traders to distinguish between beneficial EAs and scams.

D. Slows Your Learning

Trading with EAs can hamper your learning and limit your trading knowledge. This is because you are only monitoring and measuring the performance of your EA to check whether it aligns with your training goals and risk appetite. If the EA fails, you’ll need to find another one, since you may lack confidence in your own trading abilities.

3. A Checklist to Choose the Best Expert Advisors

If you’re planning on purchasing an EA, here are a few things to consider:

  • Read the reviews. Make sure there are no complaints or comments in the marketplace regarding operational issues.
  • Learn to identify EA red flags. For instance, if one guarantees profit or claims to be a fit for all market conditions, it’s likely to be a scam.
  • Go through the terms and conditions and understand them completely before purchasing the EA.
  • Verify that mandatory EA metrics, like minimum or maximum capital limits, align with your trading goals.
  • Backtest and verify its performance before allowing it to handle your money.
  • Evaluate the cost-to-benefit and risk-to-reward ratios for automating your trades with the EA in consideration.

Did you know?

Although there is no upper limit on the number of EAs you can use, their execution takes processing time. Overusing them may slow down trading, rather than speeding it up.

4. Tips to Reap the Most Benefits from an Expert Advisor

Remember that the success of an EA depends on several factors, including market conditions, financial instruments, operating parameters, and your trading goals. Here are a few ways to optimise the performance of your chosen EA:

A. Monitor Market Conditions

Make sure the EA works for the market conditions you are applying it to. Use backtesting or a demo account for this. No EA can work in all market conditions. You may need to tweak its settings or switch to a different EA when market conditions change.

B. Use Uncorrelated EAs

Such EAs compensate for each other’s performance bottlenecks and improve the overall trading output.

C. Be Ready with an Exit Plan

Markets can behave erratically at times, and your EA may get caught up in a short squeeze or an outbreak. So, always be ready with an exit plan to cut losses under such unforeseen circumstances.

Key Takeaways

  • You can get a coder to create an EA or simply buy one that suits your trading strategy.
  • EAs have several advantages, like increasing trading discipline, eliminating emotions, speeding up order execution, reducing your time commitment, and facilitating backtesting.
  • There are some downsides to using EAs as well, like missed opportunities due to technical failures, VPS costs and slow down your personal journey in learning to trade.
  • To choose an EA, remember to read reviews, look out for red flags, read the terms carefully, ensure it aligns with your trading goals, and verify its performance.
  • For the maximum benefits, tweak the EA settings in different market conditions, use uncorrelated EAs, and always have an exit plan.

 

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Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.

ADS Securities LLC (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates as a trading broker for Over the Counter (“OTC”) Derivatives contracts and foreign exchange spot markets. ADSS is a limited liability company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.

The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.

ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.