Advantages of using Forex Expert Advisors
For most people trading forex involves watching charts, indicators, and the news. They then have to work out in their head whether it is a good time to buy or sell.
For some strategies, this makes a lot of sense. For example, if you trade based on news events, then you need to be there to interpret how the news will affect the price. This is a fundamental analysis.
Many forex trading strategies rely on much simpler decisions. If you are basing your trading decisions on the shape of the chart or on the values of your indicators, then you are using technical analysis.
Many technical analysis strategies work by making decisions purely on indicators or price.
For example, a strategy might be to buy if the price moves above a certain moving average line and sell if the price falls below the line.
Another strategy might involve buying or selling based on one or more technical indicators such as MACD, parabolic SAR, or RSI.
If your strategy is based on simple rules, such as certain technical indicator values being reached, then you may find that your trading is very robotic. You wait for a specified event to happen, and then you act on it in a predefined way.
If you have a strategy that sounds like this, then it could be a very good candidate for automating – i.e. creating an expert advisor to do the trading for you so you don’t have to do it yourself.
Here are the advantages of using expert advisors for automated forex trading.
Expert advisors don’t get tired
If you are trading manually, then the amount of time you can spend trading will be limited by how long you can concentrate or stay awake.
The Forex market is a 24-hour game with trading opportunities right around the clock. If you are trading manually, then you are limiting yourself to only taking advantage of a fraction of these opportunities.
Throughout the day, you will also need to take breaks for food, drink, answer the telephone, etc. During one of these breaks, something might happen that you don’t see until it is too late. This could cause you to buy or sell at a bad time or miss out on a great trade altogether.
An expert advisor will be able to trade for you right through the night, through your lunch break, and when you are out of the house. It will never get tired and so will be able to capture all the trading opportunities that it is programmed to capture.
Of course, if the expert advisor is doing your trading for you, then you will have more free time to do more important things like reading a book or seeing your friends. Who wants to spend their life staring at a moving line on a screen or watching numbers going up and down?
A lot of people have sound trading strategies, but they fail to stick to them. You may find that your emotions get in the way and cause you to sell too early or buy too late because you don’t have the confidence to stick to your trading plan.
It is also possible for you to get stressed when trading forex, which could lead to you making mistakes in your trades. How many of us have sold when we meant to buy or entered the wrong amount into our trading ticket and then had to accept a loss in order to get out of the trade?
Once it is correctly programmed, an expert advisor will have no such problems. It will follow your simple set of rules (or maybe a complicated set of rules!) without ever hesitating or letting its emotions cloud its judgment. Obviously, an expert advisor is just a computer program, so it will just do what it is told to.
This consistency means that it will stick perfectly to your trading plan and will never diverge from the rules that it has been given. The expert advisor won’t make mistakes – if it is supposed to buy, then it will buy – it won’t press the wrong button and sell!
Speed of analysis
Human brains are great for many things, especially ‘fuzzy’ processing, like thinking and interpreting inputs from complex senses such as sight and sound. What they aren’t so good at is number crunching or making decisions based on large amounts of data that are coming in at the same time.
If you are a manual forex trader, then you will probably limit yourself to trading one or two currencies simultaneously. Trading more than this can get confusing. For one thing, keeping an eye on multiple charts can be difficult, and if significant events start happening with multiple currencies at the same time (as they often do), you may not be able to keep up.
An expert advisor has no such problems. It can handle trading simultaneously in 10 different currency pairs just as easily as it can handle trading with one currency pair. Computers are able to process information so fast that they have no trouble keeping up with what is going on with multiple price feeds.
Suppose you have a strategy that is applicable to multiple currencies, then an expert advisor could allow you to trade more currencies simultaneously than you are able to using manual methods. Alternatively, it can watch multiple currencies and then pick the best one to trade in. Imagine how fried your mind would get if you were trading in a short time frame and trying to keep your eyes on 10 charts!
Coming up with a manual trading strategy may involve eyeballing many charts and evolving the parameters you use over time.
If you write an expert advisor, then you can very quickly test your strategy over many years worth of data in just a few minutes. This will give you a much better idea of how well your strategy will perform than just eyeballing the charts.
Trying to gauge how well the strategy will work using your eyes and brain is very dangerous because of hindsight bias. You may be feeling optimistic about your strategy, and without realizing it, your brain will focus on areas of the chart where your strategy would work and will filter out parts of the chart where you would make a loss.
An automated backtest will get you much more accurate and consistent information on the performance of your strategy.
And because you can quickly test your strategy over many years worth of data, you can also re-test your strategy using different parameters. You may think your strategy works best using a 11-day moving average, but some simple testing could reveal that a 13-day moving average is, in fact, the most profitable.
Are automated Forex expert advisors the answer?
Expert advisors sound great, don’t they? For many strategies, then can prove to be much better at trading than a real person would be. They aren’t perfect, though.
In a future post, I’ll be looking at the disadvantages of expert advisors, and I’ll also be writing further about other issues to do with Forex EAs.