In the forex market, expert advisors are usually programmed using the Metaquotes language in the Metatrader program. Metatrader can be obtained free of charge and used to test drive expert advisors in a demo account.
Testing expert advisors in a demo account is denominated “forward testing”. The results are dependent on the amount of time the demo account is ran and as such, this approach is long. Taking years to obtain relevant results from the market.
Since expert advisors are a relatively new technology, the existence of this long forward tests is not common. People usually rely either on backtesting of expert advisors (which can be very unreliable depending on the software used and the testing data and condition), which involves testing the expert advisor with limited past market data, or very limited forward testing results usually ranging from one month to a year.
Non of these approaches makes an expert advisor or EA realiable or ensures that you will be making any profit in the future. An EA can have very positive forward testing for four months and then massive draw downs for, say, a year. This is because the EA has to be tested in a very wide range of market conditions. This conditions are thought to be cyclic and may require years or decades to be established. Thus, an expert advisor may need years to complete was is believed to be a “market cycle” and prove profitable. This however, is based on the hypothesis that the market is perfectly cyclic which is not entirely true as the market tends to change dramatically to unprecedented conditions from time to time.
So as you can see, there is not much hope in describing the performance of an expert advisor in such a way that it may serve as a criteria for profit making. This does not mean that there cannot be a profitable expert advisor, it just means that this EA cannot be known easily.
What I know, for certain, is that a profitable EA will mimic the decisions made by the bulk trading community a priori. This EA should in fact, decide what everybody decides. An EA should do what the majority of people are doing. The problem is that people’s trades are based on a wide variety of things, including things which the expert advisor does not know. This puts the EA on a disadvantage as it cannot base it’s decisions on the news until they are reflected on the price, which puts it after the move, not before it.
Hence my friends, the only sane way to profit from expert advisors is to follow the next simple rules for picking and using them.
– An expert advisor should show positive results in forward testing (as I have stated before this is necessary but not sufficient for an ea to be considered profitable)
– An expert advisor should nor promise more than 20% profit with a 5% risk. (Any promess beyond this causes serious doubt as by the limits of it’s nature, an ea cannot maintain such wins without loosing eventually almost or all it’s profits)
– An expert advisor should NEVER risk more than 5% of an account per trade. (this is basic risk management, a necessary tool for survival in the forex market)
– An expert advisor should ALWAYS include a stoploss. Preferably a stoploss shorter than 100 pips. Having no stoploss is a recipe for disaster. An EA does not know extreme market conditions and any sudden movement due to rare events could wipe your account.
– An expert advisor should NEVER trade by itself. Having only one expert advisor is unwise, if you are going to use them, use as many as 4 or 5 which meet the above shown criteria. Remember, don’t put all your eggs in the same basket. Also try to use different types, for different currencies and market conditions.
– An expert advisor SHOULD require no human intervention. It should be able to trade by itself. If you need to change anything, then why bother calling it automated trading ? The expert advisor should not require any expert assistance.
– Ideally, an expert advisor should be updated regularly by its creator in an attempt to adapt to market conditions and increase profits.
This guidelines (which will be updated from time to time) are the base of my criteria for picking an using expert advisors. Stick to them an you will have a much better chance of succeeding in forex automated trading. Don’t follow them and you will have almost no chance.
I will write a new post for each expert advisor I will start testing on this blog.