Better Expert Advisors : Volatility Adjusted Take Profit and Stop Loss Values

During the last few years I have seen dozens of different automated and manual trading systems. When I analyzed what made some profitable and some unprofitable I realized that most of the differences happened depending on where each expert advisor would exit the market. When I saw this I realized that the take profit and stop loss values many expert advisors try to impose to achieve a fixed trading style are perhaps the most limiting factors within their programming.

When back testing and forward testing some expert advisors, I realized that many of them were profitable up until 2006 and then plummeted all their gains in 2007 and 2008, most of these where particularly EUR/USD trading systems. Then, out of curiosity I opened an EUR/USD monthly chart with the ATR indicator. To my surprise, there was a steady increase in volatility from the end of 2006 until the end of 2008.

Most of these expert advisors could be optimized to achieve better results in 2008 but then they failed to do well in 2006 too. So the answer was very simple, the parameters they used to exit the market were unflexible and were getting crushed by changing market conditions. The fix is pretty simple.

When these experts are changed to calculate their stop loss and take profit values based on the ATR (average true range) indicator, there is a drastical change in their profitability. The ATR indicator changes according to the pair’s volatility so making an expert advisor adjust the magnitude of it’s trading orders based on a percentage of the ATR value can have good effects on it’s profitability. Suddenly, you start to realize that the system could have been profitable along all those changing market conditions if it’s exit orders had been adjusted to fit the pair’s volatility !

If you would like to learn more about free ATR adjusted expert advisors and other free and commercial expert advisors I have reviewed please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

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