What is a Forex Expert Advisor?

April 25, 2013 08:49 AM

A forex expert advisor is a trading idea or strategy that has been written down in MQL-4 programming language for the MetaTrader 4 trading platform. It can be a completely mechanical trading system that enters trades into a live market or it can be used to back test data and flag signals for a trader to process manually.

Expert advisors are able to communicate directly to the broker via the MetaTrader platform and can manage all aspects of the trading process such as entering positions, managing risk and adjusting stops. By doing so, forex expert advisors take the emotion out of trading, and thereby enable a trader to make profits without getting caught up in the stress and confusion of trading with a discretionary approach.

Since forex expert advisors are made up sophisticated algorithms they are also able to trade with a higher degree of accuracy and speed than a human trader. And due to the flexibility of the MQL-4 programming language, almost any indicator, strategy or trading idea can be easily translated into code and then put into action.

MetaTrader 4 Platform

MetaTrader 4 terminal screenshot

Types of Expert Advisors

Coding an expert advisor in MQL-4 means there almost limitless possibilities for testing out different trading strategies. However, some of the most common strategies for trading the forex markets are illustrated here:

Scalper EA: Scalping strategies aim to pick up small profits in the market from very quick trades and usually have no bias in market direction. They exist to exploit short term inefficiencies in the market and are essentially one up from high frequency trading. Scalping strategies lend themselves very well to EA’s since they rely on very fast executions that are often better made by a robot than a human trader. Whereas human scalpers can be prone to errors, scalper EA’s can execute trades with 100% accuracy and as fast as is the connection between broker and server.

Breakout EA: Just as they are with discretionary traders, breakouts are popular strategies amongst EA’s. EA’s programmed to trade on a breakout will often use technical indicators such as Bollinger Bands, ATR or price action levels. They take all the stress out of manual trading and allow the trader to sit back and watch the EA do the work.

News EA: Trading the news can be difficult for a manual trader, since it often requires lightning fast reactions and a strong stomach. Some expert advisors, however, are designed to trade news releases. They can be set up to trade only at certain times of day and thrive on the volatility created by news and economic data announcements.

Hedging EA: Forex markets are ideal for hedging strategies and allow traders to buy one currency pair and sell another with the hope of profiting from one or both pairs. The ability to hedge trades accurately is often difficult for the human trader though, because risk needs to be constantly calculated versus position size and exposure to the market. Thankfully, hedging EA’s can make these calculations in a split second so are perfect for running these types of strategies.

Trend following: Essentially, expert advisors can be designed to work on any idea or strategy. Many EA’s are based on trend following and will enter positions at the beginning of a trend and stay with it until a pre-determined profit target is hit or the logic of the system causes the EA to exit. They can be designed for different time frames too.

MetaEditor – Programming Screen

MetaTrader 4 programming screen

Advantages of Using Expert Advisors:

As already noted, expert advisors take the emotion out of trading. This means, instead of forex trading being a wild rollercoaster ride of missed profits, fear, greed and stress, trading becomes disciplined, professional and stress-free. EA’s are able to do the calculations needed to run any type of forex strategy and can run them while you’re asleep. This brings a huge benefit to traders as it means you no longer have to sit in front of a computer all day staring at your screen. Expert advisors take all the hard work and stress out of trading. Instead, all the hard work is done before you trade – in developing and testing trading ideas.

Execution speeds are clearly another advantage associated with expert advisors. Many times, a robot will be able to perform complex trading maneuvers and will do so in a flash of the eye. However, expert advisors offer more than simply speed and the minimization of emotional trading.

Expert advisors are indispensable since they provide an objective analysis of any trading idea. Traders often come up with trading ideas and strategies, but due to the limits of the human brain, it is impossible to know whether that strategy would have stood up over past data. Expert advisors can eliminate this doubt by proving (with statistical confidence) how profitable a strategy really is. They can be tested and optimized over several years of historical data and it usually only takes a few minutes. Of course, the end result is that an EA is capable of saving (or earning) a trader thousands of dollars in the long run.

How to Use a Forex Expert Advisor:

The first step to using an expert advisor is to download the MetaTrader4 platform. EA’s can then be installed to the ‘experts’ folder. MetaTrader actually ships with some free built in EA’s for you try out.

There are also many expert advisors available for sale on the internet, some of which are very profitable and easy to use. Indeed, for most EA products, there is no need to know how to code. All the information for installing and using the bot is included with purchase and usually only takes a few minutes to get going. You can search this site for a comprehensive guide to the best EA’s currently on the market.

Of course, if you want to develop your own EA’s you will need to learn how to code, (unless you want to pay a programmer to do the work for you). If you are not a programmer, probably the best thing to do would be to learn C programming since MQL-4 and C are extremely similar. Once you have knowledge of how to code, you will be able to code your own indicators and systems and have access to a whole new world of forex trading.