Types of Expert Advisors

Based on my knowledge of experts advisors, I was trying to categorize them. It turns out that I cannot categorized them distinctly. Let's look at the various categories first:

Non-directional vs directional

Expert advisors that adopts non-directional strategies are usually based on hedging or non-directional trading models such as one based on the mean reversion theory. Directional expert advisors trade news, breakout, trend, range etc.

Indicator-based vs price action-based

Indicator-based expert advisors use one or more indicators in determining trade entries whereas price action-based expert advisors merely use price action, which can even be candlestick patterns or chart patterns.

Single currency vs multi currency

Some expert advisors trade with only 1 currency while others, especially hedging expert advisors, require trading with more than 1 currencies. The PID expert advisor (defunct now) needs to trade with 13 different currencies at a go!

Rule-based vs self learning

Rule-based expert advisors trade exactly in the manner that their programmers want them to trade. A breed of self learning expert advisors make use of machine learning techniques to learn about the market and adjust themselves to trade accordingly. An example of such an expert advisor is the Bogie. The Bogies uses neural networks to "improve perceptive intelligence on order entries".

Fully automated vs semi automated

There are some expert advisors that can (or they claim they can) run on their own 24-by-7 without human intervention. Of course that is the ideal case. Most fully automated expert advisors require optimization regularly so as to stay in tune with the current market conditions. Some expert advisors, on the other hand, are developed for the purpose of semi-automation. For some expert advisors, one may need to analyze the market and only deploy the expert advisor only if the conditions are right. In some cases,  the level of automation may just merely be to adjust stop loss to trail for profits.

Regular position sizing vs special position sizing

Position sizing is how an expert advisor determine how many lots to enter. Actually, I ran of ideas to term this properly. Let me describe what I mean and perhaps you can help to propose a good terminology :-P

Regular position sizing is determining how many lots to enter based on traditional position sizing techniques. For instance, the position sizing rule may be: the amount to risk for every trade is 5% of total account balance. And this is a hard and fast rule. The number of lots to enter only increases if the account balance increases.

Special position sizing adopts techniques such as Martingale or anti-Martingale (may or not may be on top of regular position sizing). For certain Martingale expert advisors, the number of lots to enter for the next trade doubles after every losing trade!

It is good to know more about your expert advisor and understand how your expert advisor works.

3 Steps To Achieving Consistent Profits With An Expert Advisor...

We have to take a step back and think about if this statement is possible at all.

Personally, I have forward tested more than 5 expert advisors in demo accounts. After some time, I decided on running the most promising one on a live account. Right after I set up everything, funded live account and leased the expert advisor and all, I saw reports from a very popular forum that people had suffered up to 80% losses in their accounts almost overnight...when the expert advisor was catching the correct tops and bottoms and making phenomenal profits for the last few months or so. This has really shaken my belief about expert advisors.

Kathy Lien mentioned at one of her seminars that she used to work in big banks and she revealed that banks are spending millions of dollars to find the "switch".  A "switch" that will allow their sophistically developed trading software to switch between trend trading strategies and range trading strategies as the markets alternate between the two states.

William Boatright (2nd runner-up in Autmoated Trading Championships 2007), mentioned in an interview that when he tried to optimize his expert advisor for trading trends, it would not perform as well for trading ranges and vice versa.

Another clue would be...have you ever wondered why there are so many discussions and forums on the Internet actively engaging to find THE expert advisor? And those people have been evaluating experts advisors after expert advisors for so many years already...

Having said that, I still believe it is still possible to achieve consistent profits with expert advisors. Below are the 3 essential steps on how to do it:

1. Still be able to do market analysis manually - pull out your indicators, watch the supports and resistances and the candlestick patterns...you must be able to tell if the market is trending or ranging in the first place.


2. Understand how the expert advisor works - for 2 reasons. Firstly, so that you know when you can deploy the expert advisor (remember, they don't work in all conditions). Secondly, so that you can intervene when necessary. That is, you would want to close all the positions earlier (be it in profit or losses) when the market is entering a stage which the expert advisor will not perform well. I termed this "cyborg trading" - half man, half machine :-P


3. Optimize the expert advisor regularly - another reason for knowing your expert advisor well. Expert advisors usually come with a set of programmable parameters which is configurable, depending on market conditions, to let the expert advisor be able to perform at its best (but still, it is either best for trending or best for ranging, no one set of parameters for both).

For me, I took a break from expert advisors.