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The Importance of
How to Pick an Expert Advisor
Learn How to Find the Best MetaTrader Trading Robot
The Importance of Risk Management
Even when presented with the best investment opportunity or trading scenario, all too often traders end up losing their shirts because of poor overall risk control and money management skills. Especially with an EA or any automatic trading system, it is important to understand the overall role that risk and monetary management play in overall performance. A poor choice in either category can often be a recipe for disaster. Thinking of this skill set as your overall "disaster control" can often be an insightful way to look at these often forgotten proficiencies. Just like everything else in life, if you do not plan for something, it makes it that much harder to deal with if the inevitable does occur.
Once you have finally decided on the EA that is right for you, it is time to setup a game plan in order to maximize your trading potential. Even with a profitable EA, the majority of traders lose money because of poor money management and poor planning. Even if an EA may double your account in 6 months, you still are at risk for the entire amount, and still have yet to realize any of the profits. The first thing you must determine is why you are using this EA; what do you want out of it? It is important to note the possibilities of loss in trading Forex. You should not risk any money that you are unable to lose. Without a set game plan, you will not be able to maximize the potential of your EA, and may find yourself looking back and wondering where it all went wrong. Setting up key levels of profit or loss and what you are going to do when they hit these key levels, are a vital part in planning your trading. One example would be that once your EA gains 20% over your initial deposit, take some gains off the table and realize a portion of the profits.
On the other hand you may want to set limits on when to stop trading. This can help limit your overall loss as well as flag the potential that an EA may have become ineffective. For instance, if the total account falls below 70% you might want to have an automated trigger set to close out all trades and shut off the EA. This will allow you time to re-evaluate your setup and EA. This can be setup on a daily basis as well, where you could limit the maximum daily loss, or go as far to limit the max loss per trade to a set amount before automatically turning off the EA or closing out the trade. There are an infinite amount of possibilities and scenarios that you can create, however in order for these to be effective they need to be goal driven in nature and should help to enhance your trading success.
Effectively Running Your EA
Once you have set up all your different triggers and event driven scenarios, it is time to consider how you are going to set up your EA. One thing to consider is will it continuously run, or will you only have it open during certain times? If you are considering running it all the time then you might want to consider using some type of virtual private server (VPS). There is nothing worse than having your computer go haywire while still having your trades out there in the open market.
After deciding on where to run your EA, you need to decide how to run it. There are many different tweaks that can be made to each individual EA, but one of the most important factors you need to consider is the trade-size component. In order to effectively trade in any market you need to not only have sound money management skills, but you must also be well capitalized for the amount of risk you are taking. Even though many Forex brokers allow you to leverage your account as high as 200:1, this type of leverage is usually not a good idea. The most common reason Forex accounts are blown out is due to excessive leverage. Although there is no hard rule on leverage, many professional traders use about 5-6x leverage. You can use this as a pivot point when considering your risk tolerance, and the risk tolerance of the EA. If you are using a very risky EA and would like to limit your risk you might want to cut your leverage to 2-3x. Regardless of what you decide, it is of the utmost importance that you understand that leverage cuts both ways. It will magnify your gains, but will just as greatly magnify your losses. One technique you can apply is, instead of starting with a high amount of leverage, start off with a low leverage and gradually increase it, this will allow you to assess how you handle the increase in risk and prevent you from using more leverage than you are ready to handle.
The Size does Matter
Once you have decided on the funding and leverage of your account you need to decide how large your trade size will be. Here you have two options, a fixed lot amount or a fixed ratio. With the fixed lot amount you will trade the same amount of lots every trade regardless of account size. Whether the account goes up or down, you will always trade the same volume. Although this is simple it can create problems as you may become over leveraged when your account falls. The benefit however is that this is a very easy way to plan your money management strategy and helps you when considering various different scenarios. The other type of trade sizing is fixed ratio. With a fixed ratio, your trade sizes will adjust depending on how much is in your account. When your account is larger, you trade larger amounts, when it is smaller, your trade size will decrease. This is beneficial because you will always be risking the same percentage on each trade in terms of account value. However the downside is that you may end up trading monetarily more or less than you want due to the increase or decrease of your account.
Money Money Money
Money management is a topic that is continuously written about and the theories on the most effective way to manage your money are varied greatly from each method of thinking. However, what every professional trader, money manager, or any professional who deals with money will agree on is that without a sound money management system you will ultimately adversely affect your returns. There is no golden rule out there for how much you should risk or how much of a loss is too much, but it is important for you to get an idea of what you personally feel comfortable with, and then basing your money management off of that criteria. Typically you will never want to risk too much on any single trade. In many cases professionals are known to limit their potential risk to .5-2% of their total account. By doing this it allows the trader to sustain a far greater amount of losing trades than if they had a higher per trade risk. Take this example, two traders trading the exact same EA with the exact same amount of capital, but two different money management styles. Trader 1 only risks 1% per trade and in return aims for 1.5% return. Trader 2 risk up to 10% per trade and expect 15% returns for this trade. Over the first 10 trades both traders return 5 winning trades and 5 losing trades in the following order:
|Win or Loss||Win||Loss||Win||Win||Loss|
|Win or Loss||Win||Loss||Loss||Win||Loss|
Over the next 10 trade however the EA does not perform as well and only produces 2 winning trades:
|Win or Loss||Win||Loss||Loss||Loss||Loss|
|Win or Loss||Loss||Loss||Loss||Win||Loss|
Although both traders are now at a negative value, trader 2 is at a significantly lower value. Even with his increased risk appetite, it will take a large winning streak just to bring the account back to break-even, where trader one is only $261 below the initial account value. Although this may seem like an extreme situation, it is important to realize that streaks do occur and can greatly affect your account. Trader 1 has incurred more than a 50% max drawdown while only realizing a max gain around 36%. As you can tell from this example the overall impact of money management plays a key role in a trading system and it is highly encouraged to have a set and disciplined money management strategy in place before live trading.
The final piece you need to consider before choosing your EA is the reliability of the vendor. When something looks too good to be true, it usually is. In your search for the perfect EA for you, there will be many claims out there that someone has built the "holy grail" of EAs, and that you can become wealthy beyond your dreams. More times than not this will turn out to be some type of scam or ponzi scheme that may initially return you profits. After you expand or increase your account however, you will either find it all gone or no longer available. It should go without saying that before you ever buy an EA you should do the basic due diligence on the vendor who is selling the EA. It is very easy to get overly excited and blinded by the promises of great wealth. Some of the common things you should look for while doing your due diligence are audited results, customer referrals, sponsorship by financial or regulatory boards such as the NFA, as well as information on the company itself. One of the main reasons people have bad experiences with EAs is due to the lack of consideration when investigating where the EA comes from. One of the most common traps that non-reputable vendors use are theoretical trade performance results and phony manipulated back tested data. Make sure that the EA has an actual history and has been running on a live account before ever considering it. A good rule of thumb to follow is if something feeling fishy stay away, and if it feels too good to be true, than it is in fact probably too good to be true.
With that last idea, you should now be well versed on the many aspects needed to pick the perfect EA suited to your preference and style. It is important not to underestimate or over look any of the topics cover in these reports. Our goal here is to help you better understand the key factors that will affect both you and your trading and how you can maximize your trading efficiency through the use of a well thought out and researched EA. This concludes our coverage on how to pick the right EA for you, but if have any additional questions or like more information on the topic feel free to contact me with your questions. Best of luck in your search for an EA and hopefully you have gained a better understanding of what is important in your search and how it may affect your trading.