The Ultimate Guide to
Trading With Forex Expert Advisors
Expert advisors, also known as forex robots, offer a way to trade the markets in an automated fashion. Expert advisors eliminate the need of sitting in front of the computer all day, poring through charts, figures, setups, indicators, news, etc, it is possible to use software to do all this for you and then to execute a trade on your behalf, saving you all the trouble.
These robots can then be used to trade the markets while the user attends to some other business. Many traders are actually day workers who use trading as a second income stream, and this category of market players will benefit from the use of forex robots.
What is an Expert Advisor?
An expert advisor for the forex market is a software system that is built to analyse the currency pairs in the forex market to identify trading opportunities, and then to implement buy or sell signals on the forex charts. Usually trades in forex involve analysing the market by going through several chart setups, then deciding whether to buy or sell, as well as making a decision on which kind of orders will be used to produce the best trade outcomes. These are all automated when a trading robot is used.
Expert advisors (EAs) have undergone a lot of modifications from the early days in which they were introduced. These expert advisors have moved from simple robots which did analysis and then traded accounts to complex algorithmic trading software which is used today for advanced forex trading. So we will talk about this experience not just from the standpoint of the simple software, but also from the complex ago trading systems that trading robots are today.
Trading with robots is also known as Quantitative Trading. The basis for algorithmic trading or trading with robots is for a computer software system to run analyses on several forex pairs and to generate and ultimately implement buy and sell signals on the forex platforms.
If you have decided you want to use an expert advisor for your trading strategy and are looking for a broker that supports the use of automated trading with expert advisors, ETX Capital is one of the most popular choices. Some of the why people choose ETX Capital are:
- Established broker – over 10 years in business (in business since 2002)
- Regulated by the Financial conduct authority (UK) #124721
- Tight spreads
- Offers Forex, Spread betting, CFDs, Binary, Equities, Commodities and Indices
- Wide range of markets
The two types of forex robot algorithmic trading:
- High frequency trading
- Low frequency trading.
High frequency trading with expert advisors focuses on creating an edge with speed. The speed of the connection is the main advantage that high frequency trading robots confer on the trader. High frequency trading robots aim to make profit from arbitrage. In other words, they scan several exchanges or data centres where there is even the smallest of differences between the prices of the same asset.
The high frequency robots then place a large volume of trades on the lower price (for buy orders) and offload them to other traders in the market at higher prices. For example, a high frequency expert advisor may buy gold at 1,200.30 from one exchange, and re-sell same to other traders at 1,200.35. The price difference is 0.05, which may look very small. However, the high frequency forex robot may place 10,000 lots on this trade, which confers on the pip movement a value of $100,000 per pip.
Considering that this trade moved just 5 pips or 0.05 points, the profit made by the high frequency trading robot would be $100,000 X 5 = $500,000. High frequency trading robots are mostly used by institutional traders and big banks who trade the forex market. These institutional players have access to very large capital and are able to afford the relevant tools and software which can scan the market for such opportunities and execute the trades within milliseconds. These robots can trade several times in a matter of milliseconds. Retail forex traders in general, do not have access to these systems and therefore have to make do with the second model of algorithmic trading, which is low frequency trading.
Low frequency trading is a model which aims to use the soundness of the utilised trading model to gain an advantage. This is not dependent on speed. Therefore, low frequency trading robots are looking to profit from price movement over time. These price movements are determined by:
- Trading fundamentals such as earnings reports and interest rate statements.
- Macroeconomic news such as the Non-farm Payrolls report, inflation reports, housing data, etc.
- Statistical models e.g. price correlations, mean regressions, etc.
- Technical analyses e.g. chart patterns, candlesticks.
Low frequency trading EAs are developed from several viewpoints. These viewpoints aim to ensure that:
- That the idea behind the construction of the robot strategy is sound both economically and technically.
- The strategy is based on sound statistical methods
- That the basic principle of using sound models and not speed are what governs our trading robots.
This means that robots must not be used blindly. This is why it is very difficult to make a profitable commercial robot as they cannot be assessed to see if they obey the rules set out above.
How Expert Advisors Work
EAs work with algorithms which are usually programmed with specialised programming languages. The trading platform the trader uses will determine what language will be used to program the forex robot. Here is a list of platforms and the programming languages used in programming the robots:
- The MetaQuotes Language 4 (MQL4) is used to program expert advisors for MT4.
- TradeStation: The Lua programming language is used to code expert advisors for the FXCM platform.
- The ActFX programming language is used to code robots for the ActForex platforms. An example is the AvaTrader platform.
- Many professional ECN platforms are coded with more specialised languages su ch as C#.
Characteristics of a Good Expert Advisor
A good expert advisor must meet certain basic criteria that enable it to work perfectly. These are listed as follows:
- The parameters for trade entry and exit must be well defined.
- The EA must have acceptable money management parameters.
- The expert advisor must be able to evolve with the market. For this to happen, the creator of the EA must make it amenable to periodic updates.
- A commercially sold EA must have adequate protection from decompiling software. Essentially, it must be hack-proof.
- Code must be bug-free and error-free.
Where can you obtain Expert Advisors?
There are two main sources of expert advisors, buying a pre made EA or creating your very own EA from scratch. Each pathway has its advantages and disadvantages and you must be aware of these before you make a choice on which way to go.
Buying a pre-made EA
There are literally thousands of expert advisors sold online, and even more which are offered for free either as standalone bonus products or as lead-in products to other forex products. It is very difficult to get a forex robot that works from an online source. This is because there is no way for the trader to know the performance and the risk management profile of any expert advisor before purchase.
It is always a mistake to believe anything written about an expert advisor (EA) on the sales page of the vendor. You must have a way of subjecting the EA to evaluation to see if it meets the parameters for a good robot before you spend your hard-earned money. Usually the way to do this is by making use of any free trial offers provided by vendors of such products.
Development Your Own EA
There are several advantages of using this option. Perhaps the most important is that you will end up with a forex robot for you, by you and created just for you. You get to setup the EA with your strategy, fitted to your trading circumstances, your capital and risk management profile. The challenge is getting a programmer who can adequately translate your performance metrics into an actionable EA without messing up the coding process. Having your own expert advisor also allows you to edit the code as you wish.
Approaches to Building a Trading Robot
No programmer should just wake up blindly and start programming a trading robot. There is a time-tested approach to building a trading robot. The approach to building a trading robot is to:
- Design
- Program
- Backtest
- Execute
In performing this four-step approach to trading a forex robot, the trader must consider the platform to be used, the tools to be used, the platform infrastructure and how the robot can be analysed in future to assess its trading performance.
Designing an EA is where the trader looks at the strategy to be used, the money management parameters and the conditions for buying or selling a currency pair. After design, the programming aspect comes to play. This is where the design of the robot is translated into a programming code. When the code is all done, the EA must then be tested and optimised, before it is finally executed for use.
It is essential to get a skilled programmer to do the job of coding. However building a good EA is usually a multi-disciplinary approach. It requires input from various fields such as statistics, mathematics, programming and a little common sense approach.
