Many people are lured to the markets by promises of easy money via Expert Advisors (EAs) or trading robots. Selling Expert Advisors online has become a huge business, but before you take the plunge there are things to consider.
There are certainly some benefits to automating a strategy, but there are also some drawbacks. The thing to keep in mind is that rarely is making a boatload of money easy. The promise of easy money is the oldest trading scam in the book. The odds of success may be improved with automated trading and learning to create, test, and optimize Expert Advisors. Unfortunately, to do this effectively could take longer than simply learning forex trading, stock trading, and even cryptocurrency trading, since a person needs to learn how to trade first, and then still learn how to automate the strategies via a programming language or Expert Advisor builder. And buying a program comes with loads of pitfalls, which will be discussed shortly.
What is an Expert Advisor?
An expert advisor is a program that runs on a computer and trades for the person running the program. Since it is a program, it will only take trades with parameters that align with what is written in the program. Traders and investors can turn precise entry, exit, and money management rules into Expert Advisors that allow computers to execute and monitor the trades.
Expert Advisors typically require the use of software linked to a direct access broker, and any specific rules must be written in that platform's proprietary language.
The MetaTrader 5 platform, for example, uses the MQL5 programming language.
Creating a trading program requires extensive trading knowledge, as well as programming skills. Some of the best trading platforms have strategy-building "wizards" that allow users to make selections from a list of commonly available technical indicators to build a set of rules that can then be automatically traded.
An expert advisor is 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 or build with a strategy builder.
For people who buy an expert advisor, 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 expert advisor needs to be updated with it. If the expert advisor is not updated by someone who knows what they are doing, then it is quite likely the software will have a short shelf life of profitability (if it was profitable, to begin with). Expert advisors that are written by and maintained by experienced traders and programmers have the best chance of maintaining profitability over the long term.
How do Expert Advisors work?
First, you will choose a platform and set the parameters of your trading strategy. You’ll use your trading experience to create a set of rules and conditions, and then your custom Expert Advisor will apply the criteria to place trades on your behalf. These factors are normally based on the timing of the trade, the price at which it should be opened and closed, and the quantity. For example, ‘buy 100 Lucid Motors shares when its 50-day moving average goes above the 200-day average’.
Users can also input the type of order (market or limit, for instance) and when the trade will be triggered (for example, at the close of the bar or open of the next bar) or use the platform's default inputs.
Once the rules have been established, the computer can monitor the markets to find buy or sell opportunities based on the trading strategy's specifications. Trades will automatically be executed only if predetermined parameters are met. The aim is to execute trades faster and more efficiently and to take advantage of specific, technical market events.
Depending on the specific rules, as soon as a trade is entered, any orders for protective stop losses, trailing stops, and profit targets will be automatically generated. In fast-moving markets, this instantaneous order entry can mean the difference between a small loss and a catastrophic loss in the event the trade moves against the trader.
Many traders, however, choose to program their own custom indicators and strategies. They will often work closely with the programmer to develop the system. While this typically requires more effort than using the platform's wizard, it allows a much greater degree of flexibility, and the results can be more rewarding. Just like anything else in the trading world, there is, unfortunately, no perfect investment strategy that will guarantee success.
Beware the Sales Push
While a few EAs will work, and produce good returns, most will not. Few percent of people who attempt online trading are successful at it, and that includes people who create and buy EAs. The odds of success are not higher even when using a trading robot.
The people who are successful with Expert Advisors constantly watch how their Expert Advisors are performing, adjust as market conditions change, and intervene when uncommon events occur (random events can occur that affect the programming in unexpected ways). Successful robotic traders, just like successful manual traders, put in the work required to create and maintain profitability.
This is quite different from the Expert Advisors sold online that describe a life of easy money and no work... at a bargain! Once you buy an Expert Advisor, rarely is their support and updates after the fact. Even if the creator of the Expert Advisor is successful, that does not mean someone who buys the Expert Advisor will be. The creator may occasionally intervene or turn the program off (during major news events, for example). Slight changes to when the program is run can change results dramatically. Unless the creator of the program is coaching you on how to do this or providing long-term updates and monitoring as market conditions change, it's best to avoid getting sucked into the sales pitch.
Rarely Is Automated, FULLY Automated
As alluded to above, successful Expert Advisors put in a lot of work to create and maintain their programs. The real work is maintaining the program. Someone cannot simply flick a switch and watch the money roll in while doing nothing. This may work for a time, but market conditions change, and unexpected events occur, which require intervention on the part of the trader.
If a person buys an Expert Advisor, it is unlikely they will have the expertise to know when to intervene and when not to. Intervening, when not required, could turn a winning strategy into a losing one, just as not intervening when required could drain the trading account in a hurry.
In the Market Wizards book series by Jack Schwager, several successful automated traders are interviewed. All these traders were highly engaged with their trading strategies, and not just sitting back doing nothing. It is highly unlikely that a person can buy an Expert Advisor and just leave it running while they sleep and work at another job. This approach may work, but only if they stay on top of the Expert Advisor's performance, have the expertise to alter the program if market conditions change, and when manually intervene when required.
Some people think that automated trading takes the emotion out of trading. Unfortunately, this is not completely true. While the program doesn't feel emotion, the person running the program does. People may feel tempted to intervene when they see the program losing money, but the program may still be functioning well (losing trades happen). Or they may intervene to take profits prematurely, manually overriding a trade when the person sees a profit they like. All these emotionally driven actions could destroy an Expert Advisor's profitable edge in the financial markets.
Automated trading is rarely auto-pilot trading. It takes a lot of knowledge to be able to maintain an Expert Advisor, and trading skills/psychological skills are still required to intervene, when necessary, but not too much.
Advantages and disadvantages of Expert Advisors
Expert Advisors boast many advantages, but there are some downfalls and realities traders should be aware of.
- Expert Advisors remove some of the psychological pressures of trading. Although, people using an Expert Advisor still need to know when to intervene and when not to, which is still a psychological pressure/skill.
- Expert Advisors react quicker than humans can. When a trade signal appears (to enter or exit), there is no hesitation on the part of the Expert Advisor. Humans, on the other hand, may freeze or question the trade. The lightning-fast reaction time of the Expert Advisor is beneficial in fast-moving market conditions.
- Expert Advisors can monitor far more markets than a human can. At any moment, a human can only effectively monitor a few markets, but an Expert Advisor can monitor hundreds. Once let loose, Expert Advisors can find opportunities in all the markets it is programmed to monitor. EAs can take advantage of more opportunities than a human can.
- Will take trades that suit a strategy, even if the trader feels otherwise. if the strategy has proven itself profitable, this is a good thing.
- 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. People who buy Expert Advisors don't receive this benefit, and often don't know what is "under the hood."
- While some intervention is required, once a trading program is created, it may require minimal maintenance for long periods of time. This means that for certain periods of time an automated trading program may be less work than trading manually. When a program needs work though, it may require a lot of time.
- 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. Automating and testing a strategy is an effective way to see if a strategy is viable under current market conditions.
- 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 Expert Advisors. 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.
- It still requires a lot of work to create and/or maintain the Expert Advisors.
- Manual intervention is occasionally required, meaning automated trading is not fully hands-off. For example, if volatility increases much more than normal then position size may need to be manually altered.
- Some programming skills are desired. Even if buying an Expert Advisor, most don't come with long-term support or updates as market conditions change. If you don't know how to alter the Expert Advisor, it will eventually be useless (unprofitable).
- Buying an Expert Advisor means not knowing what is under the hood. One of the benefits of automating a strategy is that it forces the user to really know the ins and outs of the strategy. That benefit is lost when buying someone else's EAs.
- The user will still face psychological pressures, such as wanting to intervene when the Expert Advisor 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.
- It's unlikely that buying an Expert Advisor online will produce positive long-term results. It may work for a short period of time, but the person using it needs to maintain it and know when to intervene and when not to.
- To create your own Expert Advisors, trading, and programming skills are both required. Some programming knowledge is required even when you are using a strategy builder. The trading skills are required to create the strategy that will be programmed.
- Since Expert Advisors 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. While this may make the program look very profitable in the past, optimization often leads to inferior performance in the future. Also, since tests can be easily run, Expert Advisors 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 a live trading account and not run on a demo account or back-tested data.
Final Word on Using Expert Advisors
Automated trading can be a beneficial and profitable skill to have, but typically this skill can't be purchased for a few dollars on the internet. Automated trading takes a lot of work and skill. To effectively create and maintain an Expert Advisor, a trader needs both trading and programming knowledge, unless he uses an Expert Advisor Generator. Automated trading also requires time. It is not something to set and forget. It needs to be routinely checked and manual intervention may be required when random events occur, or market conditions change.
Learning to automate strategies is a worthwhile endeavor though. Automating a strategy requires in-depth knowledge of the strategy and makes testing the strategy very easy. If a simple strategy can be programmed, seeing how that program performed recently may provide insights into how it will perform in the future. Expert Advisors can monitor more markets for trading opportunities than humans can and can react quicker when trade signals occur.
Don't get lured into sales pitches that promise easy money if you buy an EA. Time is better spent learning how to trade, and then acquiring some programming skills if you want to automate your strategies.
Free trading tools and resources
Remember, you should have some trading experience and knowledge before you decide to use automated trading systems. You should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader.
Our demo account is a great place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.