MetaTrader (MT4/MT5) has become one of the most widely used platforms for automated trading, thanks to its support for Expert Advisors (EAs). These EAs, which are essentially scripts or algorithms that automate trading strategies, have gained popularity because of their ability to execute trades based on predetermined rules without human intervention. However, while the appeal of EAs is undeniable, there’s an important caveat: not all EAs or the results they promise are as reliable as they might seem.
The Allure of Positive Results and the Pitfalls of EAs
Many trading systems developers promote their EAs with enticing claims of consistent profits, often backed by verifiable historical results. These results can be highly convincing, but traders should approach such claims with caution. While the notion of sitting back and letting an automated system generate profits is appealing, several factors make the verifiability of these results questionable:
- Optimized Backtesting Results:
One of the most common pitfalls of automated trading systems is the use of backtested results that may not be indicative of future performance. Developers may present charts that show impressive past returns, but these results are often achieved through over-optimization. In other words, the EA may have been “tuned” to fit past data perfectly, a process that leads to what’s known as “curve fitting.” While the EA might show excellent past performance, it could fail in live trading conditions where market dynamics differ. - The Risk of Cherry-Picked Data:
Trading systems developers sometimes selectively present only the best data to highlight their system’s effectiveness. These cherry-picked results may exclude times when the system performed poorly or failed to live up to its claims. Therefore, while the EA may show a string of positive outcomes, they may not reflect the system’s true overall performance in real-world, varied market conditions. - Lack of Real-Time Verification:
Many developers showcase past performance, but true live-trading verification is harder to come by. The real market is unpredictable, and results can change when trades are executed in real-time. Developers may also use demo accounts or paper trading for demonstrations, which do not carry the same emotional and financial risks as live trading. It’s crucial to ask if the results were verified on a live account, with real capital at risk, and whether they are truly reproducible over time. - Unrealistic Expectations:
EAs are often marketed as “set and forget” systems that will work seamlessly with minimal input from traders. While this might be true under specific conditions, many systems fail to account for sudden market shifts, news events, or black swan events that can result in unexpected losses. It’s important to remember that no trading system, automated or manual, is foolproof.
The Bottom Line: Use Caution and Do Your Due Diligence
While MetaTrader’s EAs can certainly make trading more efficient, the potential risks of relying on them without understanding their limitations should not be ignored. Traders should always approach the marketing of EAs, especially those with verifiable positive results, with a healthy dose of skepticism. Make sure to:
- Verify live trading performance: Look for third-party verification of real-money results, not just backtests or demo account performance.
- Understand the strategy behind the EA: Don’t rely solely on promises of profits—understand how the system works and the risks involved.
- Start small: If you choose to use an EA, consider starting with a demo account or a small capital investment to test its real-world performance.
- Monitor regularly: Even though EAs operate automatically, they still require oversight. Markets evolve, and an EA that works today may need adjustments in the future.
In summary, while the idea of automated trading is compelling, it’s essential to be cautious of trading systems that promise easy profits based on past performance. A well-developed, live-tested EA can certainly be a useful tool, but like any other trading strategy, it requires careful evaluation, testing, and ongoing risk management.
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As you may guess from the foregoing, I’m not a big fan of the programmed robots that trade your account for you. That’s not to say that they can’t work. I set that one (that claims to double your account every month) to work on a demo account 15 days ago, and I see it’s currently reporting an account value of $5111.93, from a starting value of $5000. And although that’s nothing like doubling the account, to gain over 2% in half a month must work out to about 50% a year, and I don’t know many no effort ways to get that.
But I have no confidence that the performance will continue that long. This install was a new one, with the latest algorithms, tuned for the current market. I still don’t know what it’s doing, and I won’t know that it is going to fail until it does, because I have no idea of its inner workings. I suspect it’s momentum based, and uses moving averages to find its trades, which is fine while the market is moving in a suitable way. Update: by the time I finished this report, the robot had a losing trade which was over $100, putting the account more or less back to square one.
The problem is that a computer gives a specific answer to a specific question, and doesn’t want to deal with maybes. It’s not possible for a computer to “see” the big picture, it only deals with the fragments it is programmed to do.
What About The Others?
One important aspect of trading is how other traders see the charts and react to them. For instance, in the matter of support and resistance, they only exist because traders perceive the tendency for prices to rebound from certain levels. If your program does not include a way to perceive charts in the same way as a human trader would – and how can it? – then it is missing a vital element in trading.
Now this is a good thing, as long as you don’t yearn for a computer to do all the work of trading for you. If it really was possible to make computers or software that would do this consistently, then thousands of computers would be set to work, and there would be no place for the individual trader. But as it’s not possible, the individual trader who learns the business thoroughly and applies whole brain thinking has the potential for a very profitable career.
Why You Must Do It Yourself
But that’s enough ranting from me about black box systems versus doing it yourself. Curtis Faith was an original and successful Turtle Trader. If you have been considering or perhaps even studying trading, you are probably aware who the Turtle Traders were, and may even have read Curtis’s bestselling “Way of the Turtle”. Last year he put together another book, and I was able to get a pre-press copy of it for comment – the published book includes my comments on the back cover, and facing the title page (I wasn’t paid for providing comments, or for any book sales).
His book is called ‘Trading from Your Gut’, and I recommend that you read a copy to find out from a famous trader who earned more than $30 million trading with the Turtles how he views the art and science of trading with a ‘whole mind’. Instinct and analysis are both needed to be a successful trader. As he explains eloquently, trading is something that no machine can succeed at in the same way as a person.
