What is a Forex Expert Advisor?
A Forex Expert Advisor is an algorithmic tool that traders use to make trading decisions. We are in the era of high frequency trading (HFT) where most of the trading decisions are made by algorithms. These algorithms are developed by experience coders who use complex mathematical models to predict future market prices.
One hedge fund manager who has managed to do really well in this is James Simons who runs a hedge fund called Rennaisance Technologies. This is a hedge fund whose most employees are not business professionals but mathematics and physics PhDs. He has managed to beat the market for more than 20 years.
Another hedge fund manager, Ken Griffin who runs a leading HFT company has also beaten the market for years.
Then.. How then can you create your own Forex Expert Advisor? We'll explain it now. But first, let's be clear about the types of advisors that exist.
» Related: Forex Trading: full guide!
Types of expert advisors
Broadly, there are two main types of expert advisors in day trading:
- Automatic expert advisor - This is an advisor or robot that scans the market and identifies key combinations (even a stock screener). It then opens and closes a trade based on the built-in rules. For example, a robot could initiate a buy trade when two moving averages make a bullish crossover.
- Manual expert advisor -This is an advisor that does not open or close trades. Instead, its work is to scan the market and then send signals when the key combinations are met. After receiving a signal or alert, the trader can do more research to find out more about the opportunity.
How to develop an expert advisor
#1 - Have the Basic Knowledge
First, if you want an algorithm to make decisions for you, you need to have the basic knowledge of how these systems work. You can achieve this by reading books and watching videos of how this is done.
There are many books available that you can download and read. The best book is known as The Trading Black Box which gives a step by step guide on how algorithms are formed. Reading and watching videos will help you make informed decisions. It will also help you determine whether you want to go on with it or not.
Remember that some coding knowledge will be needed in this. Also, you must learn to sacrifice a lot since creating your advisor will take a lot of time. At this stage, you might decide to go on with the design or simply use algorithms that have been created before.
#2 - Technical Indicators
A good forex expert advisor combines a number of technical indicators and gives each one of them a ‘role to play’. For instance, in a double exponential moving average (EMA) situation, if the two lines cross in a bullish manner, then the advisor will advise that a buy trade be opened.
Therefore, you should now select the technical indicators to use when coding. Some experienced coders have also come up with their own technical indicators which they incorporate in their trading. For advanced algorithms, it will involve the use of many technical indicators.
In fact, some advisor had more than 20 technical indicators. However, you can have an algorithm with a few indicators which will perform better than a more complicated one.
#3 - Code
After gathering all the materials you need, to develop your own forex expert advisor you should start coding (Do you remember that? We talked about it a little bit above). The programming language used for this type of coding is MQL5. You should be good with it.
There are other platforms that allow you to drag and drop your code. One of them is provided by FXPRO which is a leading broker. Depending on your programming skills, this will take a few weeks or months.
#4 - Testing the Code
After developing the code, you need now to perform a number of tests. These tests will help you fine tune the algorithm.
The first test that you need to do is known as backtesting. In backtesting, you take historical data and run your code through it. Then, you should observe the results (but testing in a demo mode is important for every type of trader).
If the results are not good, you should try and fine tune the algorithm to make it better. In this testing, you should submit the algorithm to all market conditions. Then, you should use live data for a month to see how the algorithm is performing.
#5 - Live Execution and Further Development
After testing and backtesting the system, you should now be ready to use your own forex expert advisor to make trades. This should only be done after subjecting the algorithm into tests for an extended period of time. In live execution, you are now using your own money to trade!
For a few weeks or months, you should keep observing the system and how it executes trades. After one year of live execution, now you are ready to have the algorithm trade for you. You should also spend some time doing further development to the system. If this system works well, now you can start developing a new system based on another thesis.
Why use an expert advisor?
There are several reasons why many traders are now using expert advisors to trade the financial market. First, unlike a human being, a robot usually works on a 24 hour basis. As such, it is possible for a robot to scan the market and identify opportunities when you are not around.
Second, robots are essential in complementing the work of a trader. For example, if you are using a manual robot, it will help you to find trade ideas. For example, when analyzing a stock like Apple, a robot could give you a new signal from a currency pair like EUR/USD.
Third, robots that are developed and tested well can produce excellent results. This, however, depends on how well the expert advisor has been created. We recommend that you spend a few weeks or months backtesting the robots. Also, it can achieve strong results by having fast execution characteristics.
Fourth, an expert advisor can help you boost your discpline as a trader. This is especially the case when you are using a fully automated bot.
Disadvantages of using an expert advisor
Some of the top disadvantages of using an expert advisor are:
- First, when risk management is not taken into account, these advisors could lead to substantial losses. In the past, we have seen many people lose money simply for using robots that are not developed well. Here are some evergreen risk management strategies.
- Backtesting problems - At times, there are challenges brought about by backtesting since it uses historical data. In other words, while backtesting is recommended, its results might not play well in the real market.
- VPS costs - A good expert advisor works well when using a virtual private server (VPS). A VPS is a subscription package that helps to reduce lag. A VPS subscription can cost as much as $100 per month.
Expert advisors are becoming relatively popular in the market today. While many people are coding their own algorithms, most of them are using acquired bots. There are many marketplaces that deal with these bots. Before you use it, we recommend that you spend a lot of time learning how they work and backtesting them.
External useful Resources
- Discover the top 30 Forex Expert Advisor on BestForexEA's