When Expert Advisors are Necessary, and When They're Not

Many traders have become aware of trading robots, also known as expert advisors, or "EAs." Expert advisor are wonderful tools and they can add significant profits to your bottom line. Personally, if I had to choose between an excellent expert advisor and an excellent discretionary trader, I would pick the human, every time. However, EAs certainly have their place in the trader's toolbox. Unfortunately, EAs are also misunderstood, and traders who use EAs should be aware of the following myths associated with trading robots:

1. The Expert Advisor will make money for you.

The EA may decide when to buy and when to sell for you, but you, the trader will ultimately decide on the most important aspects of trading the EA, just as you would with any discretionary trading system. You, the trader, will decide when to turn the EA on, when to turn it off and decide how much to risk on each trade. Ultimately, you will determine how effectively the EA will trade your account.

2. If I make money with this EA you will also make money with the same EA.

Again, the most important and unpredictable ingredient in any trading system is the human involved with that trading system. For example, if Trader Ed and Trader Rebecca both have the same EA, Trader Ed may decide to risk 5% of his account on each trade and he turns off the EA during important economic news reports. Trader Rebecca, on the other hand, decides to use much lower leverage and she keeps the EA turned on all of the time. Maybe Trader Ed turns the EA off after 3 losing trades in a row, but Trader Rebecca will only turn off the EA if the drawdown exceeds 20%.

3. Trading with an EA will remove emotion from trading.

One of the attractive features of an EA is that it allows you, the trader, to take a step back. Many traders believe that an EA will allow emotion-free trading. This is true only if you are able to allow the EA to trade without watching the trades unfold. Once you see the gains and losses that the EA makes, you are going to experience the same ups and downs, just as a discretionary trader would, only you may have a feeling of less control. The discretionary trader has the advantage of knowing where the decisions to buy and sell are coming from, but the EA trader must trust the EA's decision making.

Unfortunately, any trader who withstands a drawdown will experience negative emotions, just as you may experience a good deal of joy after a good run of profitable trades. The difference between the discretionary trader and the trader who uses an EA is that the discretionary trader acknowledges up front that trading decisions are emotionally charged, and there will be tough times and there will be happy times. Many traders who adoptee EAs fail to recognize that the very same emotions that correspond to ups and downs in the equity curve are going to be experienced by both EA traders and discretionary traders.

One of the best ways to maximize the advantages of trading with an EA is to let the EA trade and to get out of the way. You may have to decide on some basic rules such as: Will you turn the EA off during important economic news announcements? Do you have a drawdown amount that will trigger a suspension of the EA? Will you increase the amount traded to maintain the same percentage risk as the EA increases the size of the account? Deciding on your rules at the outset, and sticking to these rules may be the best way to accentuate the advantages of EA trading.

Walter Peters, PhD is a professional forex trader and money manager for the DTS private fund. In addition, Walter is the co-founder of Fxjake.com, and often coaches other traders. If you would like to learn more about Walter's trading strategies, take a look at Walter's upcoming webinar.

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