What is an Expert Advisor?
Algorithmic trading, also known as automated trading, is the trading of a financial instrument using the decision of a computer program. The decision to buy and to sell is made purely by the program. This system became commonly known in the forex community as the “Expert Advisor” or “EA.” Autotrading in forex became famous because of the meta trader platform. They made it easier to program EA, and with the advantage of backtesting, it made people realize the benefits of using automated trading systems.
What are the advantages of Expert Advisor?
Fast execution of trades. Execution speed is usually in milliseconds. Compared to manual where you open a new trade, set the lots, stop loss, and take profit if applicable. And in a highly volatile market, this can mean a more significant profit or loss :)EAs works tirelessly. It can function from the opening of the trading session until it’s closing. For forex, that means working for 24 hours, five days a week.EAs does not know greed or fear. It removes the emotion involved in trading. No more gut feel trades, no more revenge trade.EAs are easy to backtest and optimize. Imagine testing your strategy manually, buy when RSI is below 30 and sell when RSI is above 70. And then you got curious, what if I use 25/75? 20/80? How much time would it take to finish a backtest in one year period? Not a problem with EA, aside from faster backtest, most EA platform provides optimization settings.
How do Expert Advisors work?
Many trading platforms offer automated trading, and one of the more popular ones is MetaTrader by MQL5 Ltd. Forex Expert Advisors for MetaTrader are written in the Meta Quotes programming language, also known as MQL. It allows the programmer to create EAs with the help of pre-built indicators easily. The usual procedure in using EA is by attaching it to a chart. We then set the options needed by the advisor to enter the trade.
Here is an example of an MT4 platform, with EURUSD chart opened and a MACD expert advisor attached to it. You can set the take profit, lots, trailing stop, and MACD setting for opening a trade.
To validate the strategy and correctness of the EA, it needs to be backtested. Forward testing is preferable, but it takes some time before you will know if the strategy is sound. MT platform provides a strategy tester where you can test the EA. In the strategy tester, you set the EA options as well as the market and timeframe you want to run it against. There’s also an option to optimize; it is just like running a separate test with a different setting.
In parting, as long as you can transform your strategy into an information that the computer can understand, you can trade it using an expert advisor.