Many Forex traders are interested in setting up algorithmic trading (also called algo-trading) using Expert Advisor (EA), the most popular automated trading system on MT4. In this article, ZFX will introduce the principle of Expert Advisor, how to use EA on MT4 to automate the trading process and the advantages and disadvantages of algo-trading.
What is Expert Advisor?
Expert Advisor (EA) is a computer program that run on MT4. Its main function is sending transaction instructions under special conditions to automate the entire process of trading, so traders don’t need to place orders manually. Under the condition that all positions are opened and closed using algorithms, it can operate 24 hours a day.
EA originated in the United States in 1975. Due to the rapid progress in computer and network technology, Wall Street traders became tired of staring at computers and placing orders manually every day. Instead, they will compile their own trading methods into computer programs and improve them instantly from their daily trading experience, so that the computers can automatically execute the programs for them.
The advantage of using Expert Advisors is particularly obvious in the Forex markets. It is because the Forex markets operate 24 hours a day with high daily trading volume, volatility, and interactivity between currencies, . Therefore, it is widely used in Forex trading.
How does Expert Advisor work?
EA can open or close a position automatically according to the parameters you set in advance. In essence, it converts investors’ decision-making process into a mathematical model composed of a series of “yes/no” questions, where a final decision of open position, close position, take profit, stop loss, etc. will be derived.
Traders can build an EA with their own trading model, or import an EA created by others. Using the superior computing power of the computers, you can make corresponding decisions and take action immediately, which is unmatchable for manual operation.
Examples of setting EA
EA can be simple or complex. Once a set condition is met, it will either alert you or execute the transaction automatically.
Simple Setting: suppose EA is set to alert you or open a long position with 10% of the capital in the account when product A hits 100 before 8 PM today; or go short with 2 lot when the price exceeds 300-day MA and reverse course.
Complex Setting: When the price of product A rises to 100~120, product B crosses above 30-day MA and index C is above the 300-day MA, a position of 0.1 standard lot is established every 10 pips.
As you can see from the above examples, the complexity of EA depends on the parameters and conditionals set by users/traders.
How to install EA on MT4?
Step 1: Download EA or build your own one
Users can build their own Expert Advisor programs, or purchase and download EA programs created by others. MQL5 is where one can download an EA.
Step 2: copy the EA file to MetaTrader 4 > Expert
Confirm the installation location of MetaTrader 4 (usually C:/). Move or copy the EA files to the “Expert” folder in “MetaTrader 4”.
Step 3: Select the EA to install on MT4
Open the MT4 program, click “Auto Trading” (to the left of the navigation above), click the plus sign, and the available EA will be listed here. Pull the program to be installed to one of the diagrams.
Step 4: Adjust the EA Settings
After pulling EA onto the diagram, a pop-up box will appear showing your EA Settings. Make sure all settings and prompts are correct, then press OK.
Advantages of Algorithmic Trading
1 / Save time and effort
A complete set of EA can monitor hundreds of products at the same time, so traders don’t have to keep an eye at the market 24 hours a day. There is no need to switch between different brokers or use technical analysis to find signals, nor to miss out on other trading opportunities as you are watching the presence of signals. With EA, the timing of entry and exit can be instantaneous, allowing traders to trade automatically 24/7.
2 / Screen out subjective emotions
Although programs are written by humans, algo-trading is impersonal, as described in the second paragraph. It takes away all emotions and desires, ignores the length and amount of losses, and is more patient than the human. It only cares about one thing:”Whether to enter or exit the market”.
3 / flexibility
EA can monitor a variety of assets traded on the platform, and you can set the parameters so that EA can use different strategies under different conditions. EA with strong computing power can provide a signal reference and become your good assistant when trading.
4 / Backtesting can be used to improve accuracy
In fact, setting the parameter is only the beginning. Before an EA is actually put into use, for its accuracy, a large amount of real historical data will be applied to verify the feasibility of this trading program, and problems will be found or even original parameters will be changed according to the result of backtest. This ensures that EA does not cause problems when applying to different products before use.
Disadvantages of Algorithmic Trading
1 / Frequent trading
Because EA was originally created to allow traders to move in and out frequently and profit from short-term fluctuations, most of the template settings of EA tend to establish a pattern of frequent trading.
2/ Past performance does not equal future trend
Looking back on past performance does not mean that an EA is feasible permanently. The future market is unpredictable, so it is not surprising that EA performs poorly when it comes to market changes or cyclical changes.
3 / Profit and loss are disproportionate
EA often emphasizes only the winning rate, not the profit and loss ratio. The number of profits accumulated over time may not be enough to offset a significant loss. Although EA can be changed by fine-tuning the parameters or even replaced, traders may have already suffered significant loss.
Is it Good to Use Algo Trading?
In conclusion, algo-trading is a double-edged sword: If properly applied, it can become a stable stream of passive income; however, if it is not used properly, traders may lose all the money, because the proportion of profit and loss that everyone can accept is different.
However, don’t forget that EA is also created by traders. That is, there will be some blind spots. Even if the program is back-tested for a month or even a year of data, it only means that it is suitable for that period of time. So the longer the backtesting time, the higher the reliability.
Another thing to notice is that an auto trading program is created and trained on the basis of market changes that have occurred in a limited time. But in fact, the changes in the Forex market or even the entire financial market can be unexpected, such as the outbreak of the financial crisis, and other black swan events, etc. That’s when you need to properly handle your positions on your own.
Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.
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