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The following article was published in our article directory on January 24, 2011.
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Do Forex Trading Expert Advisors Work?

Article Category: Business

Author Name: John 'The Jerk' Smith

There has been a lot of hype recently about automated trading systems (particularly Expert Advisors). Do they really work? Or are they just an elaborated scam targeting people who are looking for an easy way of getting rich?

There are sophisticated automated trading systems around which churn tons of market data and process complex mathematical equations at ultra high speed. But those are not what is available to the mass public. The Expert Advisors (EAs) known to most are nothing more than a computer program executing a fix set of trading rules - Trading rules which has been in existence for decades. If you can afford the time, you can could replicate exactly what your EAs are doing.

Advantages of Expert Advisors / Computer Programs

1. Time Saving- If you are not a full time trader, it is unlikely you will have the time to monitor the market. Even professional traders make use of tools to help them monitor the market. Using EAs alleviate this critical problem faced by most retail traders.

2. Speed of Execution - EAs perform analysis of trading rules in split second, which could be crucial if trading in smaller time frames

3. Removal of Emotions from Trading - Trading rules are useless if traders do not stick to them. Using an EA prevents traders from acting emotionally. (Assuming that the emotional trader do not overwrite the program's decision!)

Disadvantages of Expert Advisors / Computer Programs

1. Inflexible - EAs typically do not react to sudden events well. Trading rules of an EA are fixed but there are infinite number of scenarios that could happen in real life for the rules to handle. Moreover, EAs and computer programs in general require feed-back (market data) for them to respond (trade). Thus they can only react after an event had happened, which is too late. Humans can generally do a better job at reacting to sudden events.

2. Past results do not count - Most EAs have been optimized base on past market data. This is not necessary bad. However it is unlikely that history will replicate itself. Usually EAs do not perform as well as stated in their track record. (More on this in future articles on Data Mining)

There seems to be more pros than cons in using an Expert Advisor. So why do most Expert Advisors still fail?

Expert Advisors do not diversify Trading System Risk.

The main reason why most EAs fail over time is because they focus their effort on generating returns on only 1 single pair. No matter how well designed the trading system is, it cannot handle a catrastrophic black swan event (e.g. the russian default, sudden war etc)

An EA could earn you "consistent income" for many weeks or even months. However one event is all that is needed to wipe your account clean. And those events are happening much more frequently than you expected. It is analogous to a time bomb waiting to explode. Banks and Institutes knew that, which is why they hire more quants than traders!

Diversification is the key. So remember to diversify the risk inherent to all trading systems by trading multiple pairs, whether you are using an Expert Advisor or not.

Keywords: forex trading, forex system, expert advisors

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