One of the many technologies to disrupt the global financial markets is automated trading or algorithmic trading. A recent report says that the global algorithmic trading market is projected to grow from $11.1 billion in 2019 to $18.8 billion by 2024, at a CAGR of 11.1%. Gradually increasing demand for speedy, reliable and effective order execution, also reduced transaction fees will fuel this market.
Forex traders, who use the MetaTrader 4 platform, know this technology as Expert Advisors (EAs). Written in a programming language called MQL4, these programs monitor and trade the forex market using algorithms. These algorithms are based on specific parametres that traders set, such as when to get into a position, when to exit, or getting prompt alerts from the system about trading opportunities or an economic release. This is like a personal assistant efficiently executing the trader’s strategies, on their behalf.
There are many advantages of using programs like these. Let’s deep dive and find out more about them.
The main advantage is speed. These programs are able to scan the market and execute on multiple indicators in seconds. Due to rapid analysis and trade execution, more opportunities can be found at better prices. Even the most sophisticated trading strategies can be executed instantly, without the trader being physically present to monitor the charts. Such systems could be advantageous for the decentralised forex market, which operates 24 hours a day, 5 days a week. Traders obtain a huge amount of flexibility. The dramatic reduction in time spent on monitoring the markets reduces transaction costs, due to the saved opportunity-cost.
Suppose a trader wants to monitor whether a price breakout will occur in the GBP/USD pair, using the 20-day Simple Moving Average (SMA) indicator. An EA will constantly monitor this pair and notify the trader, when the price breaks out of the 20-SMA line. Or else, it could be programmed to enter a position (say, 1% of the available balance) instantly when that happens. The complexity of the EA is totally up to the trader.
Another benefit could be that of accuracy. Traders can avoid the pitfalls of manual errors. With manual entries, it is possible that a trader could enter with a wrong currency pair or mention a higher or lower amount.
It is not only human error that EAs can prevent. These programs can also eliminate human bias. EAs carry out activities, based on the trader’s instructions, irrespective of the situation. This can help avoid emotions like fear or greed taking hold and leading traders to ignore obvious trading signals.
EAs majorly help in back testing activities. Back-testing includes running trading strategies against historical data, to judge their efficacy. This helps traders solve issues, before they lose money in the real market.
Back testing can be programmed into EAs. MT4 has an in-built back testing utility, which can be used to test the EAs before being applied in live conditions. There are multiple benefits of this process:
The Expert Advisors Wizard is built into the MT4 MetaEditor. This can be used to quickly create, edit and save MQL4 programs on a user terminal. To launch the expert editing program, traders do the following:
Traders can start creating a new MQL4 program at this stage. Some fields that need to be filled are:
The “Modify” command on the “Expert Advisors” window context menu can be used to edit these programs. Traders can drag the EAs directly to forex charts. The experts start their work as soon as the next price tick comes on the chart.
The basic thing to know is that an expert advisor provides a certain amount of freedom. But, advanced traders do not just sit back and just let these programs do the trading for them. It takes a lot of work to create and maintain these programs. It’s a skill to understand when to intervene and when not to intervene. Traders need the knowledge on how to change these programs quickly to adapt to changing market conditions.
EAs stick to parametres, and do not take into account fundamental developments. It can’t make decisions if some news release changes the market’s direction. Traders can also lose significant opportunities as a result, simply because the market didn’t fulfil the prerequisite conditions of the EA.
Lastly, there are many EAs on the MQL4 marketplace. Traders need to choose the one that suits their trading style. It is prudent to do some research beforehand.