Expert Advisors – Myths & Facts Part 1

Expert Advisors are the manna for every trader, that is supposed to put him/her out of his trading misery. No more following charts, doing analysis, being emotional, closing trades early, holding trades for too long or any other problem known to traders. This is the ultimate dream – do anything you want to do, while the software is working for you, making money day in and day out.

This is why the dream sellers are so successful. They have found a niche that needs to be filled. If I had to put it in a trading slang: the risk versus the reward of being such a robot is amazing. If an EA that sells for $99 can deliver even 1/3 of the results being advertised, you can retire within 1-2 years.

 

I believe that this must be one of the major reasons why people fall for it. You can live without the 100 bucks but who knows THIS ONE might be the one. Unfortunately the one never appears and when the pain of lost money overcomes the greed, you will stop buying them. There is a moment when you will realize that it is better to invest $100 in an account, trading by yourself rather than buying some BS robot. At least when you trade yourself you gain experience. Even if you lose the cash there is something in return for your lost.

Now let’s do it the right way and start from scratch:

What is an EA / Expert Advisor or Expert Adviser / Expert / Trading Robot?

An EA is a piece of software that you can plug into your MT4 platform (usually) and this software will trade for you automatically. There are different kinds of Expert Advisors – some may trade for you 100% while other may be just a helpful tool that takes off the hard work. For example open a trade when the trend line is broken, move the stop loss to break even after condition X is met etc. There is a slight difference between Experts, Scripts and Indicators which I will probably cover in a separate article.

History of MT4 and EAs?

MetaTrader 4, also known as MT4, is an electronic trading platform widely used by online retail foreign exchange speculative traders. It was developed by MetaQuotes Software and released in 2005. The software is licensed to foreign exchange brokers who provide the software to their clients. The software consists of both a client and server component. The server component is run by the broker and the client software is provided to the broker’s customers, who use it to see live streaming prices and charts, to place orders, and to manage their accounts.

The client is a Microsoft Windows-based application that became popular mainly due to the ability for end users to write their own trading scripts and expert advisors that could automate trading.

Why there are so many expert advisors?

There are 3 main reasons in my opinion why there is probably 10-15 new robots every single day.  First of all the language used to write the software for MT4 is available to anyone who would like to learn it. There is plenty of resources that you will find on the internet that will help you become a good programmer in MQL4.

Next I think we should give credit to the people who dream of creating the holy grail. They are highly motivated and profit driven programmers/traders who are still in pursuit of the perfect algorithm or have chased it for time and are now chasing profits by selling mediocrity EAs. It is very very rare when you will see a prove of trading results for more than 6-12 months when a rabot has been making money consistently.

Most of them crash and burn only after a few months. Backtested and “curve optimized” to look amazing, these robots burn the money of clients. And this is where the main issue is, robots are not written based on some trading logic, they are written in a way to fit the results the programmer wants. And yes there are programs that will do that to your MA cross automatically. This programs will test tens of possibilities and indicators until the right combo for the given period is found. Guess what, 3 months later your amazing EA will blow your account.

Probably the most compelling reason for such a flooded market is the ease with which you can sell your expert advisor. The official website of the mt4 platform plays the role of a market (as well as the trading terminal). Yes of course there are requirements to be passes but it is fairly easy.

Can Robots Really Make Money?

If you don’t know me, let me tell you that i’m one of the biggest critics of expert advisors. I do love them as trading tool that helps you with the hard work – scanning for trends, giving alerts, following for certain conditions, managing your trade once you have entered etc… I do love them – yes! But when it comes allowing an expert advisors to control my funds 100% without me managing it…this is another story. This is completely different book and genre if you ask me!

I have been in the industry for long enough to tell you that, banks and hedge funds invest MILLIONS in such robots. They are not using MT4 and have a huge resource to backup their research and programming team. This is not $99 Expert Advisor that you will find being advertised in your email. They bring up the big guns, and STILL most of the times they can’t make it.

Smart money has now changed the game. A huge percentage of human traders has been replaced by quants. Qants are programmer, especially good in math who do quantitative analysis to determine which way the price will go. The problem here is that a quant algorithm or robot is working and living in another dimension which we can hardly imagine. Such expert advisors can execute hundreds of orders in a matter of a second.

The subject of quants and their world is extremely interesting and chapter of the article is far from enough to cover it all but just keep in mind that the world of trading is not the same as it used to be 5 or 10 years ago. It is rapidly changing. Back to the question Can robots really make money? Yes they can but as per my experience if they do, it won’t be for long. Financial market is living, breathing animal that evolves (example of quntative algorithms). We must adapt or die.

For example trading patterns – wedges, triangles etc… I still use them and i’m pretty sure you do as well if you are a technical analyst. However due to the smart money’s robots for example that also find such patterns, their reliability has fallen down during the years. If something used to work with 75/80% win rate it is now down to 60/70% win rate.

Why?

Very simple. Back then when it was all humans behind the trades, when a triangle is formed, a triangle is traded according to the rules that we all know it worked. Now the robot will spot that pattern, it will wait for orders to fill in, and since they are the market makers and most of all they can AFFORD to move the market, they do it. Robots will go and hunt your stops.

So in a summary if I had to say – can an expert advisors make money in the long run – yes it can, if trader develops it every time to the market situation \ sensitivity etc.
It is a beautiful Sunday evening here and i will leave the first part of the article up to here. Have a great rest of the weekend and I will see you again in part two. In a meantime don’t forget we might be witnesses of historical events next week (for good or bad)!

Yours,
Vladimir

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