Forex Traders Guide: How to Choose a Forex Expert Advisor

August 01 00:00 2020

Forex Traders Guide, Ever since the MetaTrader 4 trading platform has been introduced to traders, the use of forex robots or expert advisors has become very popular. An EA automates your trading and offers you several benefits like efficiency, elimination of human error, and logical trading without emotions. However, scams are taking place frequently nowadays. So, it is important to choose an EA carefully that genuinely works well. You can start by visiting the forex social forums and review sites to go through forex robots review list

The best EA for you is the one that fits your trading style, as well as risk tolerance. To find such a robot, you have to analyze the important statistics such as profit ratio, drawdown, and the risk-to-reward ratio.

How to check the statistics of an EA?

If you want to avoid scams, then you should only pick that is tested by an independent website. The best place to check the statistics of the trading results is the Myfxbook account of the EA. When you study the Myfxbook chart, you can obtain all data regarding the trading account like the starting date, deposit, balance, profit, and more. However, you need to make sure that the information is genuine and reliable. To know if the chart is trustworthy or not, you should check if the track records and trading privileges are verified. Next, check when the chart was last updated. You can be sure that the data is real-time if the chart is verified very recently. Lastly, see if all the data is open. If most of them are private, then the account is trying to hide something, which is suspicious. On the contrary, if the data is open, then you can confirm the statistics with its performance, and thus, the account can be trusted.

The statistics you need to analyze

The profit factor: The most important question for a forex robot is whether it can make money. The profit factor answers this question. So, it is one of the most important statistics. The profit factor shows the relationship between profit and risk. A fx robot may be profitable, but if it risks all the money in your account, then it is not ideal for you. To calculate the profit factor, you have to divide the gross profit by the gross loss. If the profit factor of the robot is lesser than 1, then you must not choose it. 

The expectancy: Expectancy stands for expected profit per transaction. It is the statistic that lets you know how much earning you can make on average from each trade. The statistics are based on trading history, so, it indeed does not guarantee future results, but still, it is a useful indicator when you are choosing an EA. To calculate the expected profit per transaction, you have to subtract the average loss per trade from the average profit per trade. 

The risk-reward ratio: The expert advisor’s appetite for risk is indicated by the risk-reward ratio. An EA that uses a 40-pip stop loss and a 5-pip take profit has a risk-reward ratio of 8:1. Hence, its success rate must at least be 89% to be profitable. You can see that some robots available in the market have a high risk-reward ratio of 15:1 or higher. It means that those robots use very risky strategies. However, it does not mean that the EA will never make money, but the possibility is low. 

The drawdown: A robot that takes a high risk on every trade is no good even if it makes money. When it comes to risk factors, drawdown is the most important indicator. It stands for the percentage of maximum loss since the last high point. To analyze drawdown, you have to view the equity curve chart. If the chart is rising, then the robot is profitable, but if the curve is agitated with large peaks and troughs frequently, then it is very volatile. A volatile robot has high drawdown and it poses a higher risk. At this point, you will have to remove these robots from your list and go for the ones with smooth equity curves. 

The maximum drawdown stands for the maximum loss after the last high point. For instance, a 50% drawdown indicates that the robot lost 50% of the account value at some point. If that happens right after you have started trading, then you will face a 50% loss of capital right from the start.

The average drawdown compares the several drawdown amounts of the EA. If the EA has three drawdowns, you can add them and divide them by three to get the average drawdown. It gives an idea of the results of losing during a drawdown period. 

Drawdown recovery indicates the speed of a trading system to emerge from a period of drawdown. Now, you may think that the best EA is the one that has a quick drawdown recovery after a loss. However, the ideal robot would recover slowly and steadily. 

It would be easier to choose an EA after analyzing these statistics because these will give you an idea of the EA’s overall performance.

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