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How Does a Forex Expert Advisor Work?

Reading time: 9 minutes

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 which can negatively affect their accounts. One way to avoid this issue would be to use an automated trading system. As the name implies, the system is based on preset rules, and automatically opens and closes trades.

Forex Expert Advisors - How Do They Work?

Though we do not recommend any automated systems due to their unpredictability, some professional traders have found them to be of benefit. FX trading is a 24/5 market. Being active for these long periods isn't possible for a human, however, a machine can trade for several days without having to take a break. In addition, automated trading can be performed 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.

MetaTrader 4 (MT4) is arguably the most popular customisable Forex trading platform. One of the many features of the MT4 platform is that it allows users to write entire automated trading or signal systems which can be moved onto other installations of MT4. There are a lot of FX systems available in this format and they are referred to as a 'Forex Expert Advisor'. This article will focus on what an EA is and how it works.

What Does an Expert Advisor Stand For?

The first question to is - what is an Expert Advisor? It is an FX automated trading system that is written in MetaQuotes Language 4, and is developed for use under the MT4 trading platform. Predominantly, the EA can be programmed either to perform trades for you, as well as, to manage all the aspects of your trading operation, or simply, to notify you of trading opportunities.

Additionally, every Expert Advisor is based on its design and preset rules, so EAs can differ in the rules they follow in order to trade. As with any automated software, they eliminate the chance of making emotional and irrational trading decisions, which commonly affects novices or inexperienced Forex traders. An Expert Advisor Forex follows a very strict and consecutive plan, deprived of any human intervention.

Trade Forex

Expert Advisors can be obtained easily on the internet, usually for a price. We are not inclined to recommend any for the simple reason that the results of automated software are very subjective. Some traders can make a certain amount of pips using them, while others can wake up in the morning and discover that their account is empty. If we compare EAs with Forex robots, you may not notice any distinction. Nonetheless, Expert Advisors can be directly and quickly installed into your MetaTrader 4 trading platform, and you don't need any special technical knowledge to do that.

Before describing the functions of Forex trading Expert Advisors, we would like to outline the four kinds of Expert Advisors you may encounter:

  • The News Expert Advisor - as the name implies, the main purpose is to take advantage of various news events and big price moves that can take place during big news releases.
  • The Breakout Expert Advisor - it is specially designed to open a trade when a price breaks through preliminarily determined resistance and support levels.
  • The Hedge Expert Advisor - under this category falls any Expert Advisor which plays two respective and opposing positions, diminishing the loss on one whilst facilitating profit on another.
  • Expert Advisor Scalper - such Expert Advisors pursue the goal to secure small profits once they are available. The EA will open and close an endless amount of trades for any profit, so your Expert Advisor could trade up to 400-500 times a day depending on market conditions.

Which Functions Does a Forex Expert Advisor Have?

Potentially, the best Expert Advisor Forex can be developed and programmed to work in multiple ways (e.g. by utilising a selection of technical indicators, such as the MA - 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 will make the decision as to which action to undertake - purchase, sell, or simply place an order on the market.

However, that isn't all an EA is capable of. An Expert Advisor can be programmed 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 to 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 (also known as a TP), or a stop-loss (also referred to as a SL). 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. If you are just starting out with FX trading, and are searching for a place to learn the basics of Forex, you can learn to trade step-by-step with our educational course, Forex 101, which features key insights from professional industry experts.

Forex101 Forex Trading Course

What You Should Be Aware of Before Launching Your EA

If you want to create and use your own EA, here some tips on what to do to make it work properly, aside from using a Forex expert advisor generator. The first one is the reliability of backtesting results. You might think that great backtesting results are proof of your system being ready to prosper - unfortunately it's not that simple.

In fact, these results are absolutely dependent on the quality of the data applied in the backtest, implying that poor data can lead to unreliable outcomes. The default data in MT4 can only reach a modelling quality of up to 90%. Whilst this seems good, this can actually cause considerable differences in backtesting and the live experience, particularly on smaller time frames.

Fortunately, there are sources of freely accessible historical data and instructions on how to prepare the needed data for MT4. Reliable data is the first step in adjusting an EA to trade a live account. The next step is comprehending your execution speed. MT4 demands trading activity for more than 30 seconds, which is known as a trading session.

If you are using a free Forex Expert Advisor during your session, it will time out automatically if there is no trading activity for more than the period mentioned above. This requires the IP address to be automatically re-authenticated with a password and a login. This can take some time, even up to two seconds with some brokers. Even though it may seem insignificant, in times of high volatility, delays this size can have a substantial impact on the trades' results.

If you have spent any amount of time writing a complex Expert Advisor in MT4, you probably know how difficult it is to debug the code. Since the MetaQuotes policy shows that they cater more to the needs of brokers than traders, you will find that a debugger isn't included in the list of available tools - it does not matter whether your EA is one of the free Forex Expert Advisors or a paid one.

Luckily, there are some things available to make your life easier. One method is to input print functions directly into your code, although that can become very hard to manage, particularly if you have thousands of lines and don't know where the problem is. You can also download the Microsoft DebugView in order to view a methodically formatted log. Our last tip concerning your EA is the following - make sure to test your MT4 connection.

Your platform has to be turned on and connected directly to your broker to run your Expert Advisor. There is nothing more disappointing than thinking you have an EA only to find out that it has been disconnected, and is unable to reconnect. While MT4 is designed to automatically reconnect to the server without any problem, this does not always work as expected.

If you possess multiple MT4 accounts, occasionally the wrong credentials are used during the process of reconnection. The best resolution is to delete your unapplied accounts from the Navigator window in MT4. Although this may not necessarily be a considerable problem, it can be quite frustrating if you are getting disconnected and your Expert Advisor is not continuously up and running.

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. In addition, there are a lot of scams on the internet, and finding a really good EA demands a considerable amount of time.

In creating your own EA, make sure to take into account the tips we have exemplified to avoid unpleasant situations, then it may have the potential of becoming the best Forex Expert Advisor. If you would like to learn more about Expert Advisors, make sure to check out our related article: Best MT4 Expert Advisors

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Risk Warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.