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How to Pick the Most Reliable Forex Expert Advisor

Written by Feng Zhou  Senior Market Analyst Feng Zhou

It's natural for an ambitious Forex trader to strive to be into action all the time and utilize every opportunity to get profits. Unfortunately, it's physically impossible to stay glued to the screen all day long for five days a week if one trades traditional Forex markets or even 24/7 if his preference falls with cryptocurrencies. Besides, everyone knows the golden rule of successful Forex trading, which is to turn off emotions and approach the markets like an impassive robot. But why numbing yourself to the state of the machine if you can employ the actual one to semi-automate or even fully automate the currency trading while taking the human factor entirely out of the equation? That's why we have Forex expert advisors (EAs), a type of software that can either feed you the emerging trading signals while the execution of trades is done manually or take over your trading completely, which means opening and closing position on its own accord but in compliance with the pre-programmed instructions.

The current market for expert advisors is filled with different products, with almost each of them promising sky-high returns over a relatively short period of time. But like with anything in life, something that seems too good to be true will eventually deceive your expectations. And if the money is on the line, you should approach the matter of picking the Forex advisor with utmost seriousness because you wouldn't want to pay a pretty penny for something that would ruin your account. That's why we have come up with a list of suggestions and cautions about picking the most reliable EA that responds adequately to the ever-changing market conditions and actually makes you money instead of sending it down the drain.    

EAs that add to position size are destined for failure

Oftentimes, nascent Forex traders who want to automate or semi-automate their trading strategies would buy into the marketing stunts from EA providers. Obviously, none of the developers would offer the product that showcases net profits and drawdowns that aren't meant to impress. But the key to choosing reliable Forex expert advisors lies in a trader's ability to identify red flags, which suggest that a certain advisor could be a part of a scam.

One of the main traits of a good EA is that it rarely increases the position size drastically. In order to identify this flaw, you would have to apply a trading strategy with no less than 98% modeling quality while doing the backtesting to ensure the accuracy of obtained results. The important thing here is to pay attention to the relative drawdown displayed over an extensive period of time. The EA that we ran a backtest with didn't display drawdowns higher than 30%. But that was only at first glance. Upon closer analysis, the relative drawdown turned out to be over 85%, which is basically the death sentence to most accounts that belong to retail Forex traders. Therefore, determining a relative drawdown is a must when deciding on which Forex advisor would run your account. Obviously, if it is anywhere higher than 60%, your balance would eventually end up being decimated.

However, even if the drawdown is tolerable, you always need to study how advisors behave in different market conditions and, most importantly, how the position is being increased when the trade goes the right way. For instance, if you notice that the software initiates the trade at half a lot and then puts the pedal to the metal and goes straight to about seven lots on the next trade, that is a sure sign that the reliability of this EA is under big question.

Most Forex traders don't even have enough capital to execute such positions. Try to stay away from EAs that even double the lot size at the initial stages, especially if you are a rookie Forex trader. Remember that this is a classic trick that providers use to brush up their test results and present the EA as insanely profitable. They are just blatantly applying the Martingale method, which is widely considered as an extremely risky Forex trading strategy.

It's a trading advisor, not a software for holding

Another tip for choosing a reliable Forex trading advisor is to meticulously check the duration of trades executed by the software. Certainly, the trade duration largely depends on your style of trading, but even if you are a positional trader and set up the EA in a corresponding way, it shouldn't hold the losing trade for more than a month or two, and most definitely shouldn't add to its size. A few advisors that we have backtested over the past few years had displayed some pretty stunning results, in the worst sense of this word, by holding onto losing trades for more than a year and still closing it at a loss. Once again, this is another shining example of how the providers that aren't bound by professional ethics are manipulating the EA setting to achieve the results that would translate to better sales of the product, but not more profitable trading.

A hidden danger of smooth equity curve

Another thing that you need to be wary of when trying to pick the best Forex advisor is to avoid EAs that show an overly smooth equity curve. For your information, the equity curve is a visual representation of the progress of one's Forex trading account. Understanding equity curves is quite simple: an uprising one indicates that the applied trading strategies are viable and yield substantial profits, whereas the ones that are going south signal the presence of significant flaws in the trading method. Analyzing the equity curve in Forex is similar to reading the charts when trading. You can even plot different period moving averages to be able to see when the strategy loses its efficiency.

The method for monitoring the account's performance using MAs is quite simple: if the equity curve slides below the moving average of your choice, the strategy is highly likely to have ceased to be relevant, and a trader should consider switching to another approach. In case the curve moves back above the MA, the strategy could be applied once again.

The problem with equity curves displayed by numerous providers of Forex expert advisors is that they are unnaturally smooth. Let's face it; if you aren't running a big hedge fund that has the means for maintaining the positive performance for months and years due to the use of sophisticated trading and hedging methods, your equity curve is likely to have ups and downs, especially during the periods of unforeseen changes in market conditions. Having a picture-perfect equity curve can look very appealing to an inexperienced Forex trader who is scared of going through all trials and tribulations of real-life trading or who is naive enough to think that trading foreign currencies could be a smooth ride. Bear in mind that not a single strategy can ensure consistent profits over a protracted period of time.

An example of a choppy equity curve after a period of “smoothness.”

An example of a choppy equity curve after a period of “smoothness.”

It's highly likely that the developer of an expert advisor resorted to manipulation when testing the software. As already mentioned, making a Forex robot hold onto losing trades for an absurdly long period of time without closing them is one of the methods used by unprincipled EA development firms to smooth out the curve and make its product look more appealing.

The presence of the "perfect equity curve" means that EA is likely utilizing a bad money management system, such as the mentioned Martingale method, as well as cost-averaging or the grid-based trading approach that might even produce satisfactory results if applied in the right conditions, but might as well be detrimental to the account when used inopportunely. You ought to remember that more often than not, a superb equity curve ends up crashing and ultimately blowing up one's Forex trading account. Nothing in this world is perfect, especially when it concerns trading, whether it's Forex, stocks, or crypto - a reliable expert advisor for Forex has to have drawdowns that are adequately reflected in the equity curve. Otherwise, someone could be trying to scam you.

Another thing to watch out for with regard to the equity curve is the situation when the equity curve is always, or practically always, located below the balance curve, especially when there are big dips displayed by the equity curve. This is one of the most definite signs that the expert advisor is tailored for the Martingale or the cost-averaging system, which, as already mentioned, might leave your account in shatters.

Conversely, when the equity curve is almost constantly above the balance one, it means that the account is in floating profit most of the time. The ability to keep one curve above the other is a sign of an efficient Forex expert advisor that copes with the task of riding and trailing trends, and also utilizes a sound money management system.       

When a high win rate is actually bad

You have probably heard the expression, "Keep the losses small and let the winners run." It means that a successful Forex trader has to make sure that the average winning trades yield significantly higher profits compared to the losses suffered after the losers are closed. In that case, the winning rate is not of particular importance. For instance, if your winners are twice or even three times larger than the losers, then even the win rate of 50% can be considered as a sign that the applied strategy is capable of bearing fruit on a continuous basis. This principle is applicable regardless of whether you are trading manually without any automation or use an expert advisor.

Therefore, if you see Forex expert advisors that boast incredibly high win rates of 75% or even above 90%, it's highly likely that they are inherently flawed. The reason being that such an astounding win rate usually conceals a really poor risk-to-reward ratio, which implies that the losers might actually be much bigger than profitable trades.

Interestingly enough, the stats have it that retail Forex traders have a winning rate of close to or above 60% in many popular Forex pairs. For instance, the average win rate on EUR/USD across all exchanges amounts to 58%; GBP/USD has a win rate of 63%, while it climbs above 70% on AUD/NZD. But you well know that close to 90% of retail traders are losing money when speculating with foreign currencies. The reason for that being that, once again, the ratio of their winning trades is smaller than that of losers.

Percentage of winning and losing trades in Forex

Percentage of winning and losing trades in Forex. Source: DailyFX

Therefore, at the end of the day, a trader with a 60% win ratio might end up with more money in his account than his peer with a 75% win rate. One might rightfully argue that a good expert advisor should perform better than an average trader - otherwise, why pay so much money for a piece of software - but there is no point in denying the fact that an organic win rate of above 80% that doesn't conceal substantial losses is unattainable even by the most sophisticated trading algorithms available to retail Forex traders.

Average gains to loss ratio

Average gains to loss ratio. Source: DailyFX

The chart above reveals the truth behind the seemingly great win rate in the EUR/USD market since it clearly shows that the average loss recorded by traders in that market is significantly higher than the average gain. The same principle applies to Forex expert advisors: the attractive win rate is likely to be the window-dressing for an inefficient trading strategy, test manipulations, or a downright scam. All in all, a good expert advisor might showcase the win rate that's barely above 50%, but if it produces the win/loss ratio of at least 2:1, you can count on getting consistent profits in the long run. 

The intricacies of choosing the scalping-oriented expert advisors

Even though many Forex EAs are marketed as being the highly profitable tools for scalping, which is the Forex trading style that implies the utilization of large position sizes for the purpose of obtaining moderate to small gains over the shortest possible holding time. Basically, what you or a Forex robot be doing when scalping is buying the currency pair at a suitable point of entry and then selling it for a profit in the space of the next minutes or even seconds, while having multiple positions open throughout the day. The key to successful scalping lies in robust risk and money management, as well as the ability to assess the position size correctly. Besides, getting substantial profits out of a scalping strategy usually requires the use of leverage, which is something we don't recommend to inexperienced traders because that is the most likely path to a margin call.

And while scalping has many positive aspects to it, such as a low entry barrier, the absence of the necessity to study the markets thoroughly due to the fast-paced nature of this trading style, and the lower probability of losses during trend reversals, it also has many downfalls that might also affect the performance of an expert advisor, especially if it incorporates a faulty or even a poor elaborated trading strategy. Once again, the major con here is leverage trading that can magnify the losses to the extent that your entire trading account would end up being blown up.

Another reason why the Forex expert advisors that have a specific emphasis on scalping can't be considered as reliable is due to high trading costs that are associated with high spreads or trading commissions. The newbie scalpers on Forex usually experience the situation when a trade that appears to be profitable on paper actually carries losses due to a disproportionately large spread or fee that negates or even overwhelms those few pips of gains.

But if you do insist on using the scaping-first expert advisor, you must make sure to choose the reputable ECN broker with the interbank spreads that are as narrow as possible. Some brokers offer zero-spread or zero-fee accounts, so you can opt for one of those and combine it with the robot that is tailor-made for this specific style of currency trading. However, before setting the advisor into motion, you must first apply a very strict spread filter that would halt the system from making any trades when the market conditions show the presence of unacceptably high spreads. The spread filter sets the highest acceptable spread for the advisor to enter the trade - it's recommended to set it close to the minimum low to avoid the unnecessarily risk of being involved with the market that displays wild volatility, hence high spreads.

In addition, when back-testing the scalping strategy for an expert advisor, or analyzing the test results offered by the provider, pay particular attention to the duration of the trade. Over the years, we had witnessed instances when the robot was in a trade for less than a second without any regard to the spread, which resulted in protracted losses and even evaporation of the entire trading account. Most scalping robots do well on demo accounts but ultimately fail when applied to live markets.

Also, you must be aware of the fact the performance of the scalping method used with EA might work well with one broker while showing far worse, or even the opposite, results when applied to the platform hosted by another broker. We experienced many scalping strategies fail when transferred to a different broker's account along with the expert advisor. The reason for that is that not all actually fit the requirements for swift scalping, such as latency. 

To summarize, scalping using Forex expert advisors is a highly risky endeavor, especially if you intend to use leverage, but the best thing to do to avoid being wiped out is to pick the advisor that features the spread filter that is strict and precise enough to regulate the robot's involvement in the market under certain conditions; stick with the broker that offers the lowest spreads or zero-spread accounts, and don't even think about letting the software "do its thing" without you being actively involved in the process. Plus, make sure that the advisor is tested on high-quality data; you can instantly modify the entry inputs and other settings even in the midst of a hot trading period; the advisor is applicable to multiple timeframes and across different currency pairs. 

The indispensable trailing stop loss

There is an eternal discussion in the Forex community about the use of stop losses in one's trading system: some prefer mental stop loss to hard stop; others opt for a trailing stop loss strategy, which is something that we also prefer. Therefore, it's our conviction that a profitable Forex expert advisor ought to have an inbuilt trailing stop option since it's a vital part of Forex risk management. We've already mentioned that the worst FX expert advisors usually incorporate inefficient money management strategies, while the cream-of-the-crop EAs that offer such a valuable risk management tool as trailing stop loss.

When picking the EA with such an option, make sure that it's capable of operating at several Forex charts at a time, so you wouldn't have the inconvenience of having to upload it to each separate chart. The advisor must initiate automatic stops for every opened trade. Also, a high-quality EA must execute a vast scope of conditions for closing the trades, such as breakevens seamlessly. Avoid advisors that set very tight stop losses by default, and make sure that the software is compatible with the Forex broker of your choosing because, in our experience, some advisors that featured tight stops had execution issues when used with mid-tier brokers.

It's also advisable to look for EAs that have the breakeven variable that automatically applies the stop loss in that zone once a certain profit in pips has been obtained. In our experience, it's a superb option that facilitates solid risk management, though it could potentially lead to the increased number of instances of you being stopped out. Nevertheless, having the breakeven order in place will be beneficial in the long run. BreakEvenExpert is a great EA for that particular task. 

A good Forex EA should also have the feature that allows to automatically take a specified percentage of profits as soon as the entire trading account turns green. TrailingStop is probably the finest expert advisor for executing such a strategy. We also suggest paying attention to EAs that are capable of setting up and executing a stop loss when the price tests the moving average of preferred periodicity. It might be a bit riskier strategy, considering the price often uses MAs as support or resistance, which means that you could be stopped out right at the zone of reversal, but historical data suggests that EAs with this particular parameter tend to yield satisfactory profits while minimizing the risks.

The more sophisticated expert advisors incorporate the proportional trailing stop, which implies that the system automatically protects a certain percentage of pips already in profit - the strength of the ongoing trend determines that percentage. The EA that has this option can be dubbed the most reliable Forex advisor because it allows the owner to maximize the profits by taking into account the possible range of the market movement.

Lastly, it would be best if you avoided expert advisors that are pre-programmed to trade with a wide stop loss or no stop loss at all. Needless to say that trading without a stop loss, whether it's a manual or an automated Forex trading, is a direct path to financial ruin, period. Therefore, if EA's test results display a smooth equity curve, but many trades haven't been closed for weeks or months, it's most likely that the provider has neglected to add strict stop loss setting, so that curve will drop down hard eventually and leave the trader's account dwindled away to nothing.

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