This is the third part of the “Ea, robot or expert adviser – myths & facts” sequence of articles. If you are interested to start off with the first two parts go ahead – click here to read Part 1, click here to read Part 2.
The subjects covered by article are as follows:
Part 1:
What is an EA / Expert Advisor or Expert Adviser / Expert / Trading Robot?
History of MT4 and EAs?
Why there are so many expert advisors?
Can Robots Really Make Money?
Part 2:
Can you blindly rely on a robot for the long run?
Why 99% of the robots sold are scam?
How to recognize a good Expert Advisor?
Can a good robot cost less than $100?
Today I will continue with some tips to look for if you decide to go with a fully automated expert advisor (ea) after all. These tips could save your account so please read carefully and next time you go hunting for robots make sure you check about the notes below.
Be careful of scalpers a.k.a. scalping ea
Scalping is a trading style which generally aims for quick trades. Get in, get out in a matter of seconds or minutes. Scalping could generate tens even hundreds of trades per day hence it has the potential to make a lot of money in very short periods of time hence it is very attractive to many people especially beginners who look for quick cash.
Truth is scalping is an extremely difficult style due to many reasons such as: a lot of fake moves, fake signals, execution must happen very very fast as every pip counts, spread has a big influence on the outcome, stress is a big factor etc…
When you look at the description of scalping it is kind of obvious that a trading robot would be really helpful. The EA will execute the trades and respectively close them significantly faster than you. It will not bend the rules or misread the rules due to the short period of time allowed to enter a trade and so on.
Problems may arise though. Spread is one of the most common issues you will encounter. If the EA has been optimized to work and make profits on 1 or 2 pips spread and you broker offers 2.5 or 3 or 4 pips for the given pair you will lose money. Half pip could be the line between profitable and losing EA when it comes to scalping.
Slippage is another common issue. Backtests and forward tests differ from live trading. When the EA starts dealing with the “real” world of trading results often don’t look as good as they are supposed to.
What i’m trying to say here is that scalping is very precise trading technique with very small room for error. Scalping is micro computerized surgery which even best surgeons couldn’t pull of without the help of the high-tech machines they use to operate. Keep that in mind when you are buying a robot or looking for a signal provider. Not all of them are like that but keep your eyes open. Dig deeper and see how the robot operates. What might the potential problem when you start trading it live?
Be careful of martingale EAs
Let me shortly explain what martingale is for those who are not familiar with the term. Martingale originated in 18th century in France. It is a betting strategy developed (and in theory it should work) to never lose. Basically you place your bet, and if you lose, you would double your bet on the next turn. If you lose you would double your last bet again and so on and so forth until you win. In theory sooner or later you will break even. Once you you do, you start with the initial (first bet) amount. If you win right off the bat, you place the initial amount again.
Martingale is a very popular strategy which found it’s way into the trading world. However there are 2 huge problems to consider.
First of all you will need a very very big account. Capital is a key factor for success in martingale. If you experience a big drawdown, in other words a losing streak of 4-5-6-7 trades before a winner you should have a huge capital to cover the margin requirements. Here is an example. Initial trading lot size = 1 (standard lot).
Trade 1 = 1 lot
Trade 2 = 2 lots
Trade 3 = 4 lots
Trade 4 = 8 lots
Trade 5 = 16 lots
Trade 6 = 32 lots
Trade 7 = 64 lots
64 lots!!! Only after a streak of 6 losing trades. How much money do you think you should have in your account to sustain this DD? Absolutely ridiculous.
Next you should consider the Risk:Reward. Remember that your profit is always based on 1 lot. If you hit target with the very first trade (1 lot) you start over the cycle with 1 lot again.
What that means is, you will “block” a huge amount of money that will bring you very little profits in the longer run. Of course this is strictly subjective. Some may find it very attractive to trade a theoretically “no loss” strategy. Deposit 100k, start trading with 0.5 lots and hope for the best.
Third and biggest issue in my humble opinion is when the LOSS occurs in the “no loss” strategy. One day, due to some news, earthquake, war or god knows what a huge move will come that will trigger more orders than you can handle. When this day comes and this day will come, you will lose it all. ALL!
Looking back at our hypothetical scenario, you could’ve been making small profits for 2-3 years in a row until one day you have nothing. I don’t like these odds.
Martingale strategy are very popular as their performance curves looks amazing. Smooth up curve with volume spikes which most people ignore. This volume spikes are indeed what wolf that is sleeping in the flock of sheep. When the wolf wakes up one day it won’t be pretty.
Can you build your own EA?
At one point you will get tired of being disappointed over and over again. Ideally, you will have a stash of books that you went over, gained some experience, met people, shared ideas…
This is the point when many traders would start developing their own ideas. The process usually involves the basics first of all. MA crosses to which you add some extra filter. Multiple time frame confirmations. Then the custom indicators come into play. What i have noticed is that experienced traders would start looking for the holy grail without even realizing it.
I guess you go too far and you forget about the basics. There are no holy grails. I have seen traders who have a great idea in the beginning. The coding begins and somewhere on the way the idea turns into something completely different. That might work but most time it wouldn’t.
This type of trader’s have a losing mindset by default. The greed is stronger than the rational mind. There will always be a something else to be added to increase the profits and decrease the drawdown. Problem is usually that “something” comes with a price. Safety is lowered, risk is increased and yes the robots starts making more money but eventually blows off your account.
So should you try to build your own EA? Probably yes, perhaps no. Ask yourself whether you can control you emotions. If you are an experienced trader who makes money with manual trading than the answer in my opinion is YES. You know how to protect your money FIRST OF ALL, you know that 100% or 90% win ratio is either impossible or too risky to accomplish. You know what to look for. You know when to stop tweaking.
If you are just a beginner who has no idea how things work think about that: the idea that you have at the moment in that matter, the next 50 ideas that you will have in the near future, are ideas that someones else already had, developed, discussed and failed with. Once you have an idea go ahead and try to find similar ideas on forums. Three hours of research on the internet will save you money, time and more money.
It is extremely rare to see a trading idea which was not covered by someone else already. If you are new at trading, chances are your idea is not new to the world of trading.
That would be all at this stage. I hope the 3 articles will help you and save you money. Don’t blindly trust sellers, robots, eas, signals providers (like myself 🙂 ). Always always do your research. Don’t take rational decisions. Try to get in touch with real people who have used a given service or robot. Be suspicious – it will save you a lot of cash.
I’m not paranoid, i was just burned too many times in the past. I have learned my lessons and finally made it! It depends on you whether you will learn the lessons yourself.
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Yours,
Vladimir
