The world of forex trading is complex and it takes going through a lot of intricacies to be able to sustain success in this market. As a result, in order to prolong this success, traders need to use any tool that they have at their disposal. One such group of tools are known as expert advisors or EAs.
An expert advisor is in essence an automated trading tool that can help with the trading process either wholly or partially. This assistance with trading is done based on an algorithm that has been coded into the EA. But these are not just any automated trading tools. These tools are specifically to be used with the popular trading platform MetaTrader – either MT4 or MT5. In this article, we are going to dive deep in the concept of Expert Advisors and see how exactly they work to execute trades in the forex market.
What Exactly Is an Expert Advisor (EA)?
As we briefly discussed in the intro, an expert advisor or EA is an automated trading tool. The difference between an expert advisor and any other forex trading robot or tool is that an expert advisor is specifically developed to be installed and used on the trading platforms of MetaTrader 4 or MetaTrader 5.
This is exactly why expert advisors are programmed with the help of the programming language known as Meta Quotes Language, otherwise known as MQL, which is the proprietary coding language developed by the Meta Quotes company behind the popular MetaTrader platforms.
Furthermore, we have many different types of expert advisors that range quite extensively in the tasks that they can execute. There are those expert advisors that are only capable of executing simple tasks that are mostly in one direction. That means simple tasks such as performing analysis and then providing the results to the trader to be used for making sound decisions in the market. Then there are those expert advisors that are so long reaching in their capabilities that they can execute the entirety of the trading process on their own, thus taking over the steering wheel from the trader such that the trader needs only to sit back and watch. So, as you can see EAs are quite wide ranging in their capabilities.
To sum up, an Expert Advisor can still be regarded as a trading robot that has been developed based on algorithm to execute trades. This means, when you activate an EA, it will, like a human trader, watch over the market and use the price movement data to make analysis. This analysis is in turn used to make trading decisions with regard to entry and exit points for opening positions in the forex market.
How Does an Expert Advisor Work?
The underlying mechanism behind the workings of an Expert Advisor is following a predetermined algorithm, a sort of step-by-step system of rules that gets the EA from point A to point B where point A begins with price analysis and B ends in trade execution. The actual complexity of this process totally depends on the specific expert advisor that we are talking about. But in general, we can see that the following parameters are observed in almost all expert advisors:
- Entry Point: this factor would define the expert advisor under what conditions or what price should it enter a new position. It can be based on any defined criterion, such as based on a specific result yielded from a technical indicator that would signal ideal conditions for opening new positions.
- Exit Point: on the other hand, this factor is used to help the expert advisor determine when an open position ought to be closed. Similar to the entry point factor, the exit point factor can also be based upon different criteria, including risk management options such as when a stop loss is triggered.
- Position Sizing: this is another important factor that is well embedded in the decision-making algorithm of an Expert Advisor. This factor will help an EA calculate the size of position based on factors including the total capital, risk factors, the level of risk management, profit targets, trading strategy, etc.
- Risk Management: of course, another factor that is present in the algorithm of expert advisors and plays an important role in the decisions that the EA makes is risk management. It breaks down into numerous other factors including stop loss levels, etc.
What Are the Main Types of Expert Advisors?
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Fully Automated EAs
As the name suggests, these expert advisors are able to carry out trades in the forex market fully on their own and do not need additional input or continuous guidance by the human trader. As a result, such expert advisors are really ideal for novice traders who do not have a lot of experience and want to delegate the trading task entirely and also for those professional traders who want to allocate their time and attention to other markets or financial activities.
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Semi-Automated EAs:
This type of expert advisors does not actually execute the trade on their own. Rather, they only provide the data to users and give them hints or signals about when they should enter a position and execute a trade. It is the trader himself who makes the final decision.
What Are the Pros of Using Expert Advisors?
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Emotionless Trading:
One of the biggest and most significant upsides of using expert advisors is that they remove the human emotion factor from the process of trading. Emotional trading can be quite damaging and lead to false decision-making routes that could easily end in loss. But naturally with an algorithm you will never have this particular issue.
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24/7 Market Monitoring:
A well-known peculiarity of the forex market compared with most other financial markets is that it runs all the time around the clock without stopping for 5 days a week 24 hours a day. Naturally, for a human trader it is not possible to trade during all this time. But an algorithm never sleeps!
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Backtesting:
Using an EA will allow the trader to backtest the algorithm and trading strategy before actually using it. This feature of the MetaTrader platform will let you choose historical data and run a simulation with your expert advisor to see how it would have performed under those conditions. Then with the report that you acquire, you can set out to optimize your expert advisor in the best way possible.
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Speed and Consistency:
Something else that we can see with an expert advisor is just how quickly it is able to perform trading tasks in the market and also with such high consistency. Both of which cannot be seen with a human trader, at least not in the long run. Even if you are able to trade with high speed, it cannot be sustained for long periods of time. But an EA can operate at the same level of efficiency and speed for indefinite periods of consistency.
Are There Any Downsides to Expert Advisors?
With all the benefits of expert advisors we have mentioned so far, it is also necessary to mention that there could also be some potential downsides to using EAs and as the trader you need to exercise caution not to fall prey to such pitfalls.
Too Much Dependence on EA:
You need to remember that the success of your trading experience with an Expert Advisor is only as good as the quality of that expert advisor. If you happen to rely on an EA that is not very high quality, you can end up with poor results in the long run. Even if you are using a good EA, if you do not optimize it and leave it be for extended periods of time, market changes and volatilities will eventually catch up with it and yield undesirable results. So, remember to always observe and adjust your expert advisor if necessary.
Market Changes:
Financial markets are dynamic and ever moving by nature. Especially a market such as forex, we have never-ending small movements all the time. So, if the Expert Advisor is not designed to be able to handle sudden market changes, it will inevitably incur losses on you. This is also something else that you need to be very aware of when choosing an EA.
Lack of Fundamental Analysis:
A rather peculiar downside of most expert advisors that could easily lead to losses is the lack of fundamental analysis integration into the EA. Fundamental factors play a substantially significant role in the outcome of price changes in all financial market, especially the forex markets where financial vehicles are the currencies which are so closely tied to their economy and economic factors. So, if the expert advisor you are using is not able to handle this aspect of market and price analysis, your positions can easily fall prey to changes that are the result of fundamental factors.
Is EA the Right Choice for You?
All in all, so far, we have discussed the concept of an Expert Advisor, how it works, its advantages, and also some of its potential downsides. The question you might be asking yourself at this point is that “is an EA the right choice for me?”
It all boils down to the expert advisor that you choose. Our EA can provide you with all the advantages we have mentioned in this article while at the same time easily circumventing all the downsides mentioned.
The XAUBOT, which has been developed to be used with MetaTrader 4 is compatible with all currency pairs in the forex market and is also able to trade many pairs at the same time, giving an unparalleled edge in the market.
Furthermore, XAUBOT comes equipped with advanced technical analysis options as well as AI-based fundamental analysis tools so that you can also rest assured about fundamental factors of trading in forex.
So if you want to get the ideal sides of trading with Expert Advisors in the forex market, make sure to get an ideal EA such as XAUBOT.
