Forex robots (EA) have become very popular ever since the MetaTrader 4 trading platform was released. A forex robot or an expert advisor is a piece of computer software that automatically makes trading decisions on behalf of the trader. Forex robots are designed with inbuilt trading rules, which enable them to enter and exit trades without requiring the physical presence of a trader.

The most profitable robots are usually also the most risky ones. Before you invest your money, it is essential that you test the robot with a demo account and do backtests on historical market data. Choose an ECN forex broker that allows you to trade micro lots in order to start real trading with minimum risk and also to see if the EA works well with that broker.

Therefore, to avoid losing your hard-earned money, you need to make a good decision before buying an expert advisor for automated trading. This article will provide some essential tips for correctly choosing a forex robot.

How do Expert Advisor work ?

EAs work by enabling you to set the parameters by which opportunities are found, and positions are opened and closed – essentially using a set of yes/no rules to trigger trading decisions. You can either build an EA for yourself, or import one that someone else has built.

By combining lots of yes/no rules into a complex mathematical model, EAs can execute sophisticated trading strategies, using computational power to make decisions – and act on them – almost instantly.

Before using an expert advisor with a real trading account, you need to know in advance the financial risk that you can afford to take.

Analysing an Expert Advisor’s stats

1) The Profit Factor

The profit factor is one of the most important statistics. The profit factor is important because it shows the relationship between profit and risk. A robot that is profitable – but nevertheless risks all of the money in your account – is not an ideal robot.

To calculate the profit factor:

Profit Factor = gross profit (sum of all winning trades) / gross loss (sum of all losing trades)

If the profit factor is less than 1, you must eliminate it immediately, choose EAs with a big profit factor.

2) Expected profit per transaction

The expected profit (Expectancy) is a statistic that tells you how much you could earn on each trade on average. As much as they are based on past trading history, which doesn’t guarantee future results, it can still help choose the best and profitable forex robot.

Expectancy is the difference between the average profit per trade and the average loss per trade.

3) The different types of drawdown

A robot that makes money is no good if it takes too much risk on each trade. Drawdown is a very important indicator of risk. It shows the percentage of maximum loss recorded since the last high point. This can give you an idea of the potential drop in your account when the robot is in trouble.

The first step to analyze drawdown is to look at an equity curve chart. A rising curve indicates that the robot is profitable, but if the curve is rather agitated with frequent and large peaks and troughs, the robot is very volatile. A volatile robot will most likely have a high drawdown and pose a greater risk. You can therefore quickly filter the robots by selecting charts that display a smooth equity curve.

Maximum drawdown simply shows the maximum loss since the last high point. For example, a 50% drawdown means that at some point the robot lost 50% of the account value from its highest point. For example, if you opened a trading account with £10,000 and started to use this EA at the wrong time (just before the drawdown), you would have been subjected to a 50% loss of your capital from the start!

The average drawdown compares the EA’s various drawdown amounts. For example, let’s say that the expert advisor had 3 drawdowns, the first 10%, the second 4% and the third 12%. To calculate the average drawdown, you just need to add the three drawdowns and divide by three (10% + 4% + 12%) / 3 = 8.7%. The average drawdown is interesting to look at because it gives you an idea of what you can expect to lose during a drawdown period, while the maximum drawdown showed you the worst case.

Drawdown recovery is an indicator that measures the speed with which a trading system emerges from a period of drawdown (in time or in number of trades). As you can imagine, it is best to choose an EA that is able to quickly return to positive territory after a loss. However, a less volatile (and less risky) robot will recover from a drawdown in a slow and steady manner, unlike a riskier robot.

4) The risk-reward ratio

The risk-reward ratio indicates an Expert Advisor appetite for risk. An Expert Advisor that uses a 5-pip take profit and a 40-pip stop loss has a risk-reward ratio of 8:1. It therefore needs a success rate of at least 89% to be profitable.

Some EAs on the market – especially the ones that scalp – have a risk-reward ratio of 15:1 and higher, which indicates that it uses a very risky strategy. A high risk-reward ratio does not necessarily mean that the EA does not make money. An Expert Advisor with a 95% success rate will still be profitable with a 15:1 risk-reward ratio, but if that rate drops to 93%, the EA will lose.

Most EAs feature options that allow you to manage risk by adjusting the maximum SL and TP, which allows you to improve the risk-reward ratio. However, you need to make back tests before changing the settings to see if the changes do not affect the strategy.

Why are Expert Advisors popular ?

Timesaving

A correctly-programmed EA can monitor hundreds of markets, meaning you don’t have to watch price movements 24 hours a day in order to find new opportunities.

Emotionless trading

Emotion can affect your bottom line. Automating your trading helps take the emotion out of your decision-making because an algorithm only views the markets in black and white.

Flexibility

Your EA can run on any market that you can trade using MT4, taking lots of information into account including price movements, economic announcements, technical indicators or even your current available balance.

Risks of Expert Advisors

Inexpert advisors

If the promise of a program that beats the returns of the world’s best fund managers at a fraction of the cost sounds too good to be true, then it probably is. So, if you’re planning on buying a readymade EA, it is imperative that you carry out your own research to make sure that what you are buying is worth the money.

Lack of human interaction

No matter how sophisticated your EA is, it’s no match for the human brain. As such, it is important to remember that while taking some of the emotion out of your decision making is often useful, removing it entirely can bring new problems. It is always important to keep track of how an EA is performing and assessing whether it is in line with your trading logic.

Not always online

Unlike a web trading platform, to run MT4 you have to install it. This means that you can only access it from the device you install it on, and your EAs can only run when that computer is switched on, with MT4 up and running and connected to the internet.If you want your EA to run round the clock, you’ll need a virtual private server (VPS).

Conclusion

Appropriately choosing a forex robot is critical to your success as a trader. If you do not invest your time and resources in making the best decision, you may fail to realize the benefits of trading forex using expert advisors. But while a well-coded, fully backtested and properly monitored EA can be hugely beneficial to your trading, there are some major pitfalls to avoid.

If you apply the tips outlined in this article, you will undoubtedly make a good choice and attain the objectives of your trading career.

Happy Trading !!