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An Emotional Standpoint
How to Pick an Expert Advisor
Learn How to Find the Best MetaTrader Trading Robot
An Emotional Standpoint
Although hard statistics make up the majority of our decisions; such as cost, effectiveness, and various other measures, there are often many intangibles that also go in to our decision making process. In our previous articles we have calculated and discussed the quantifiable measures that go in to choosing an EA. In this report we will focus more on the feel and stylistic preferences that help in our decision making process.
Qualitative Factors to Consider
One of the most over looked factors when picking an EA are the fit and feel of an EA. This is not easily filtered into quantifiable statistics and is essentially on the other end of the spectrum as a qualitative factor. Although it is harder to depict and screen for this type of information, it is ultimately just as important as the information provided by quantitative statistics. The reason this information is so valuable is due to the very essence of human nature. Even though an EA is fully automated and will only execute trades that fit specific parameters, the person who owns the account, more times than not will interfere when things do not go according to plan. Although it is nearly impossible to eliminate all emotions from trading, even if it is using an automated system, it is possible to eliminate many of the potentially dangerous habits that occur due to these emotions. By taking a few extra steps to ensure you are comfortable with the EA you can greatly enhance your trading performance and ultimately save yourself from a lot of heartache.
Questions are the Answers
The first question you need to ask yourself before choosing any EA is "what style of trading you are comfortable with?". In this respect you want to focus on how you might feel during each trade, and what you expect out of each trade. For example, how long will you feel comfortable sitting in a trade? Are you able to concentrate when you have trades open or are you the type to lose sleep worrying about what happens if the market moves against you? If that is the case you will want to focus your search on an EA that makes quick short term trades and does not hold a position open very long. By ensuring you are comfortable with the trading and execution style of the EA, you help ensure that your personal emotions will not interfere with the EA. This goes a long way in preventing human interference such as closing out a position preemptively. In addition it helps to eliminate the unwanted stress to your personal life that can be associated with trading an EA you are uncomfortable with. On the next page is a table with some common types of trading personalities and what type of EA they might be most comfortable with.
|Trading Personality||Description of Trader||Trade Style that Best Fits||Trade Styles to be Avoided|
|Autonomous||This type of trader prefers to have very little contact with the systems and wants the system to be able to run on its own.||An EA that requires minimal adjustments and has a steady historical performance might be ideal.||EAs utilizing extreme leverage, large drawdowns, or high maintenance often require more attention and surveillance of the EA.|
|Aggressive||This type of trader prefers a high frequency of trades and has a high risk appetite.||A scalping or higher risk EA might best suit this type of trader. Typically this type of trader looks for large gains due to an increase in risk.||Slow trading systems are often too tame for this particular trader. This can often lead to the trader manually interfering.|
|Anxious||This type of trader cannot handle having multiple open positions at the same time. Additionally this trader has a low risk tolerance and does not seek longer term trades.||A system which not only has a low drawdown, but also relatively low trade frequency and average trade time might be ideal. Typically this trader prefers waiting for the perfect setup and then locking in their gains.||Any system that relies heavily on leverage or has any significant amount of risk will cause negative emotions in this trader. It would be wise to stay away from complicated and heavy volume EAs.|
|Minimalist||This type of trader looks for a simple yet effective system that will not over trade and will make the most of each trade.||The ideal EA should have clear entry and exit factors that are easy to understand. Simplicity and effectiveness are the key elements here.||Highly complex and complicated systems may cause this trader to worry and get frustrated. Any system that cannot be understood will ultimately adversely affect the trader.|
|Complex||This type of trader wants a varied and complicated approach to trading and expects various different trades to be constantly made.||Opposite of the minimalist trader, something needs to always be occurring in order for this trader to be content. EAs that are constantly trading or have varied and complicated approaches are ideal.||Simplicity is a negative trait in any EA this trader looks at. Any EA that is too simple will frustrate this trader.|
The "What If" Conundrum
After you decided what style of trading you will be comfortable with, it is important to determine a few "what if" scenarios in order to test yourself and evaluate the fit with a particular EA. As you remember before, max drawdown is a key statistic used to calculated potential risk and loss. Before going live with your EA it is important to really focus and consider this factor. You should run a few scenarios through your head before ultimately making any decision. By now you have probably already determine that the max drawdown is a number that you are comfortable with, or at least think you are. But if it occurs right in the beginning of your trading, is it really something that you will be able to deal with. Not only can the max drawdown occur almost immediately, it also can hit a new max drawdown for the EA. For example instead of a 30% loss, you actually realize a 45% loss, 50% greater than you were planning for. What would you do now? Would you panic and close out the account, or would you throw more money in hoping to recoup your losses when the account returns to normal? If you would have done either one, then you have already let emotion affect your trading and more likely than not, adversely affected the trading performance of the EA. It is very important to remember that the past is just that; history can never completely indicate the future. An old trading motto is "Your greatest loss is always ahead of you." With this in mind it makes sense to plan for the worst and hope for the best. By doing so you are increasing the chances that you will act rationally and not emotionally when making a decision while your EA is running.
The Style that Suites You
Now that you have evaluated your emotional ties to the EA, it is time to take a moment and consider if the actual product and strategy is fitting to your trade style. Each EA has its own strategy and system to make trades; but just because it seems profitable and does not exceed your risk appetite on paper does not mean in practice it will perform well. Although we know accuracy plays only a part of determining an EA's profitability potential, without knowledge of its average win/loss, it will have psychological effects that will present problems. For example, a EA with an extremely low accuracy and high average win may have a great expectancy and profitability factor, but since more times than not your trades are losses, a trader may get nervous and act emotionally after seeing several consecutive trades lose money.
Another factor to consider are the currency pairs the EA will be trading. Not all currency pairs are created equal and not all currency pairs move in the same way. Some pairs are extremely volatile and some are not. Some will move in bearish patterns while others will be in a bullish pattern. Before actually trading your EA make sure you are comfortable both with the level of volatility the pair displays as well as the stance the EA has for that particular pair.
For instance the AUD/NZD pair is typically considered a volatile pair with prices spiking in various directions even during trending periods. However let's say this pair was in a downward bearish trend and your EA looks to profit from range bound trading. In this case even though everything may be statistically solid with the EA, the pair and market in which you would be trading contradicts the EA and can cause adverse trading performance that should be considered before going forward. There are many other example of contradictions, and it is vital that you take your time assessing this before activating your EA. The biggest thing to remember is that an EA is supposed to make your trading less complicated. If at any point you feel that a particular EA is adversely affecting your personal life then more often than not it is best to re-evaluate the EA and possibly choose another better suited to your desires. Remember even the most profitable EA can lose money when put in the wrong hands. That is why it is a necessary condition that you are comfortable and confident in your choice of EA and its trading style. Once this is done you can set out on your final task of overall risk and money management. We will cover this in our next article and discuss the key features you want in order to control your EA.