What is a Forex EA/Algo Trading, and How Algo Trading Works?
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Forex trading (FX) doesn’t always go smoothly, and sometimes it can be frustrating. Some Forex traders can become greedy or fearful, and for this reason, they are often inclined to make bad decisions that can negatively affect their accounts. One way to avoid this issue would be to use an Expert Advisor, or EA.
An EA is an automated trading system, which automatically opens and closes trades based on preset rules.
Though we do not recommend specific EAs due to their unpredictability, some professional traders have found them to be of benefit.
FX trading is a 24/5 market. Being active round the clock isn’t possible for humans, however, a machine can trade for several days without ever needing to take a break. In addition, EAs can be used on a number of FX trading platforms. Some of them allow traders to fully customise their trading systems, and then use them on a personal account, such as MetaTrader 4 and MetaTrader 5.
This article will focus on what EAs are and how they work.
What Is an Expert Advisor?
The first question is – what is an Expert Advisor? As mentioned earlier, an EA is an FX automated trading system. In MetaTrader, they are written in MetaQuotes Language 4, and are developed for use under the MT4 and MT5 trading platforms.
EAs can be programmed to automatically generate trading signals and notify you of trading opportunities. Another type of automated trading system is a Forex robot which, like an EA is a program that can identify market patterns and generate trading signals. However, unlike an EA, a Forex robot can automatically trade on a trader’s behalf. An EA, on the other hand, will always require a trader to manually authorize a trade.
Every Expert Advisor is based on preset rules, but EAs can differ in the rules they follow in order to trade. As with any automated software, they reduce the chance of making emotional and irrational trading decisions, which commonly affects novices or inexperienced Forex traders. A Forex Expert Advisor follows a very strict and consecutive plan, free from any human intervention.
Which Functions Does a Forex Expert Advisor Have?
The best Forex Expert Advisors can be programmed to work in multiple ways (e.g. by utilising a selection of technical indicators, such as the moving average indicator, or the MACD – moving average convergence/divergence indicator) or by searching for necessary trends and breakouts.
By applying those diverse indicators, the EA can analyse the market, as well as the behaviour of individual financial instruments, and can generate a signal about trading opportunities.
EAs are similar to Forex robots, which are another type of automated trading software. When using strict definitions, the difference between an EA and a Forex robot is that an EA will generate signals while a robot will perform trades without any manual sign-off required. However, the terms are often used interchangeably, which means that many so-called Expert Advisors are capable of far more than just generating signals.
Some Expert Advisors are designed to take full control of your account. The idea here is that it will look at your current account balance, before deciding how much of your balance can be put at risk. The general rule of thumb is to only risk 1 – 2% of your account balance.
Furthermore, it may review the trades and decide whether there should be a trailing stop, or a simple take-profit, or a stop-loss. As soon as Forex Expert Advisors have the necessary information, they also take into account the dominating market conditions. Consequently, you will be notified when to open a particular position.
Advantages of an EA
Forex markets are open somewhere in the world 24 hours a day/seven days a week. Using an expert advisor, or a similar trading tool called a forex robot, to carry out trades in your absence enables you to take advantage of trading opportunities while you’re working, asleep, or otherwise occupied.
Using an EA also removes the emotional factor from your trading. Your fear or greed won’t play a role in whether you choose or decline to respond to trading signals; the EA will carry out trades based on your instructions without considering how it would spend a profit or weather a loss.
If forex trading is your main income generator, using an EA can reduce your stress level and make a potentially emotionally and mentally exhausting and very time-consuming enterprise a lot less so.
On a related note, an EA or robot can consider far more variables at the same time than you could hope to wrap your head around. And it can consider those variables for several different currency pairs at the same time. You can not, no matter how intelligent you are.
Disadvantages of an EA
If your EA isn’t able to respond to real-time news, it would ignore important fundamental reasons for making or not making trades. If you’re at your desk monitoring the news, you can avoid such trading mistakes. We, here at PAFX, monitor all our EA trades 24/5 in order to be completely safe.
And similarly, even though the EA can deal with more variables at once than you can, it can act only according to what you’ve programmed it to do. You’re not as rigid in your thinking and can respond to variables that fall outside those limited parameters. And there may be times when that’s necessary to avoid a big trading error—or take advantage of a significant opportunity.
How Do MetaTrader Expert Advisors Work?
Knowing that anyone with a subscription can write an Expert Advisor, you can assume that there is a vast range of MT4 and MT5 Expert Advisors. Some of them have been developed especially to trade news events and to then remain out of the market at all other times, while other EAs are meant to stay active 24/7.
All Expert Advisors have an identical purpose, and that is to fully automate the Forex trading process and produce a profit while doing it. Expert Advisors utilise technical indicators to gauge conditions on the market, and then make trading decisions. Prior to using an Expert Advisor, it must first be attached to a chart on the MT4 platform.
An MT4 or MT5 Expert Advisor can take into account dozens of factors and elements in order to decide what the next actions will be. This capacity to consider such a wide range of price affecting elements, as well as the discipline of an emotionless automated trading system, can often lead to quite a useful and successful combination.
Is it possible to run more than one EA at once?
The answer is yes. You can use multiple instances of an EA on the MetaTrader client terminal. It is worth noting, however, that not all Expert Advisors work together on one terminal. This is mainly due to the fact that they will try to handle each other’s open trades. Programmers tend to get around this by applying special numbers in the market entrance part of the Expert Advisor’s source code.
There are some platform restrictions, however. For instance, one Expert Advisor in MetaTrader can only communicate with one trading server at any one time. If multiple Expert Advisors display a lot of activity on the same terminal, and more than one tries to communicate with the trading server, you will eventually receive ‘trade context busy’ errors in the logs. This occurs if you have too many EAs on a single client terminal.
Do Expert Advisors work in 2021?
EAs tend to cause quite a lot of debate on the internet. First of all, let us define the positives:
- An EA does not sleep – it can work 24/5
- It is deprived of any emotion
- Nothing can distract an Expert Advisor from working
- Expert Advisors are available for the MT4 platform
Besides the standard disadvantages, which include the lack of creativity, there is also the fact that it is really hard to verify the accuracy of any EA, unless you have used it yourself. Let’s outline two scenarios that could occur as a result of EA use:
- The first one is that the Expert Advisor for MetaTrader 4 or 5 tweaks countless times, and it still cannot show steady profits on a demo account.
- The second one is that the EA actually performs really well on demo accounts, but for some unknown reason, when traders try to apply them on live accounts with their own funds, suddenly the EA does not work as well, and traders lose their money.
Conclusion
By using automated software like an EA, you can benefit from the following advantages: it can trade while you are sleeping, it is not susceptible to emotions, and you can quickly run backtests. However, it is hard to define whether an EA will help you to achieve profits. We, the PriceAction family, are giving the opportunity to you guys to make profits while you are in your sleep. We are here to monitor your trades all the time. So don’t miss out on the opportunity of PriceAction Algo Trading. Subscribe as soon as possible.
