What are Expert Advisors and how to use them in analyzing the markets?

MetaTrader platforms are dominant platforms in Forex trading. Most brokers offer them due to their unchallenged reliability and simplicity. Trading automation is becoming increasingly popular. MetaTrader platforms are using trading algorithms called Expert Advisors to automate trading.

Forex markets are open 24 hours a day. However, this is not a practically viable option for manual traders as we need to rest and spend time with our family. Expert advisors give traders the luxury time as they help automate market analysis based on predetermined trading rules. EAs can work 24 hours a day and scan multiple assets simultaneously while humans do not have such superpowers. After finding trading opportunities, they can notify traders or place orders themselves.

Definition of expert advisors in forex trading

Expert Advisors, or EA-s for short, are trading algorithms that are created for MetaTrader 4 and MetaTrader 5 platforms that monitor the market to identify opportunities and send signals to traders or place orders automatically based on predetermined instructions.

MetaTrader 4 uses MQL4 coding language while MetaTrader 5 uses MQL5. Consequently, if you have a MetaTrader 4 EA, you cannot run it on MT5. However, you can learn coding or hire someone to convert the algorithm for you.

EAs are used in various automated tasks. Humans have limitations while robots do not share many of our weaknesses. EAs can be used to automatically place orders, monitor markets or backtest trading strategies. EAs are also involved in copy trading.

Using EAs in market analysis

The customizable nature of expert advisors means that they can easily cater to the needs of traders with different strategies. For instance, swing traders require more focus on fundamental analysis to identify trends as they form, while day traders need thorough technical analysis and these are areas where expert advisors shine through sheer speed and volume of data collection.

Hedging

Open positions always carry a certain amount of risk. Expert advisors can identify useful hedging strategies depending on the nature of the open positions and its exposure to downside risk. In general, hedging is especially important to traders with large open positions in relatively volatile assets. The market is constantly shifting and hedging against existing positions can greatly reduce the potential for substantial losses. EA-s are great consultants in this regard. Certain EAs can be selected to show positively and negatively correlated currency pairs. Traders can use correlation to hedge their risks.

News

Some EAs are developed to keep track of the news as they develop. Dozens of articles are written about any minor development which can be hard to sift through. Luckily, some expert advisors can help go through hundreds of news pieces within a matter of seconds and lift a heavy burden off of traders’ shoulders. Certain EA-s can identify major catalysts based on the news available to them and signal traders.

Backtesting

There are EAs that help traders backtest their trading strategies. Backtesting regularly is important as market conditions often change and backtesting keeps trading strategies up to date. Traders can run backtesting algorithms as Expert Advisors on their platforms. Later they have the opportunity to choose leverage, timeframes and other technical details. Backtesting using EAs saves a lot of time and energy as you can simply compare your trading strategies to historic chart data.

Factors you should consider before using expert advisors

• Building a complex EA takes time and is difficult to debug once it faces a problem. Imprinting multiple sets of instructions to an Expert Advisor is not an easy task and MetaTrader does not have many solutions to this problem.
• EAs can analyze multiple markets simultaneously but the method is always dictated by the algorithms and rules chosen by the trader.
• Some EAs that you can purchase on the market are not working and many EAs that work are built for trading specific instruments under specific market conditions.

Advantages and disadvantages of using expert advisors

While expert advisors can make life much easier for traders, they are not perfect and have their strengths and weaknesses.

Advantages

• Expert advisors can identify multiple complex variables in multiple markets simultaneously and multitask with no added stress.
• EAs are free of the emotional side of trading and can fulfil their work diligently.
• Expert advisors are considerably faster than humans and analyze the market at speeds out of reach to humans.

Disadvantages

• EA-s are only as good as the data they are given, which means a single error can derail the EA-s code and make them obsolete
• It will ignore factors that cannot be programmed into it but are nonetheless relevant for the market
• EA-s are rigid in following predetermined directions and cannot change decisions on the go. They are bad at coping with changing market conditions.
• Some degree of human intervention is still necessary for EA-s to work as intended

Common pitfalls of substituting active trading with expert advisors

Some traders may have an overblown view of EAs and their capabilities, which can lead to pitfalls and confusion when building one.

Basing all decisions on Expert Advisors

Analytical Expert Advisors can research all sorts of industry data and give recommendations based on various technical indicators, but it is advisable to use their features in moderation. More stable market conditions are advantageous for EAs, as they easily analyze charts and identify favorable entry and exit points. However, during periods of heightened volatility, direct human contact is necessary to adjust the directions given to expert advisors to avoid unexpected losses and unfavorable positions.

Main takeaways from Expert Advisors in Forex

• Expert Advisors are programmable trading companions that analyze data, trade or give signals to traders.
• EAs can serve different functions and work with various trading strategies to maximize profits and take advantage of technical indicators
• Expert Advisors do not share human weaknesses and can operate 24 hours a day. They can scan a large number of trading instruments simultaneously in order to find trading opportunities.
• Industry professionals and full-time day traders are the primary target user base for expert advisors
• Changing market conditions can render predefined directives obsolete, therefore, expert advisors need direct human involvement to remain effective

FAQs on forex expert advisors

What are Expert Advisors?

Expert Advisors are MetaTrader trading algorithms that are created to automate the trading process. Expert advisors are automated systems that help traders trade or analyze massive amounts of data and formulate trading strategies. Expert advisors are highly customizable and offer solutions in research, strategy and backtesting.

Can I customize expert advisors in forex?

Expert advisors can be customized to build complex strategies and directives with dozens of different variables. EAs will act on these directives, but cannot execute trades on their discretion, as they require manual approval from traders.

How do forex Expert Advisors work?

Expert Advisors are run on MetaTrader platforms. They help automatically analyze markets and signal when to make trades or they can also automatically place orders based on your predetermined rules.

Are expert advisors profitable?

It depends on the EA. There are many algorithms or Expert Advisors developed to trade Forex markets ever since the MetaTrader platforms were released. Many EAs are profitable when trading certain instruments, while others do not work at all. It’s important to do your research prior to purchasing an EA.