To understand how Forex Expert Advisor works in the Forex market (or any other financial instruments) you need to know its core components. Here's the list of it:
What's Forex Expert Advisor, Actually?
Forex Expert Advisor isn't physical or mechanical bot you've imagined as sort of childhood hero made out of metals or irons. In fact, Forex Expert Advisor is simply lines of codes written on a terminal which is programmed to execute buy or sell orders based on specified signals. You can learn how to assemble the code yourself, even though in reality it may requires a fairly high degree of disciplines to develop it into a working model.
The first thing to know, most Forex Expert Advisor comes from MQL4 (MetaQuotes Language4), a C-based programming language which most bachelor of IT, or IT college grads should be familiar with. Basically, it provides the basic framework for every Forex Expert Advisor. MQL4 programmers simulated a certain trading method in form of scripted behaviors where it will issue commands triggered only after assigned conditions were met. Implying that Expert Advisor can NOT change or rewrite its own behavior sets beyond what the developer has set it up for. Therefore, making Forex Expert Advisor less flexible on highly volatile markets.
Even so, further development cycles (where they update their Forex Expert Advisors several times on a regular basis) can upgrade Forex Expert Advisors to store hundreds or even thousand of different behavior sets to "adapt" to the best of that Forex Expert Advisor capacity for volatile and elusive forex market.
Anatomical Structures of Forex Expert Advisor:
It's essential to understand every base building block of a Forex Expert Advisor before trying to develop one. On a side note, these are basic elements of the Forex Expert Advisor, which some sophisticated Forex Expert Advisor may deviate from. So, let's start with a basic rule set:
A. Entry rules
Entry rules regulate when or at which conditions should a Forex Expert Advisor open a position.
B. Exit rules
Exit rules are simply the opposite of entry rules. Specifically, it regulates when or at which conditions a Forex Expert Advisor will close a position.
C. Position sizing rules
A little bit more complicated than two rules before. These rules basically regulate how big of a lot (currency units) on opened/existing position may hold. In plain words, it's your capital exposure to the target market.
From a programming standpoint, those 3 rules are very important as one slight mistake in defining a rule condition may result in the malfunctioning Expert Advisor. So, how bad a malfunctioning bot can be, you ask? At best, your Forex Expert Advisor can't even decide when to open a position, worse things may lead to your account capital being drained in an instant!
Next thing to learn is trading strategies. Remember what I said about Expert Advisor's scripted behavior set? Simply put, trading strategies are the foundation by which Expert Advisor simulates trading decisions. Trading strategies range from high-risk, high-reward or aggressive setups to conservative setups. So, in other words, It's all comes down to how the developer laid out the rules set (that 3 basic rules) according to his quantitative analysis. Sounds like a gibberish? Okay, let's just get straight to the point:
Expert Advisor Trading Strategy Expectancy:
A breakout often occurs after a period of consolidations (sideways market condition) of an instrument or a pair. Simply put, you programmed instructions for Forex Expert Advisor to buy or sell according to breakout signals which is derived from your quantitative analysis of the target market. You can expect a handsome price movement for about hundreds of pips from a breakout.
B. Martingale/ cost-averaging:
A very risky trading strategy where you will command Forex Expert Advisor to double capital exposure (doubling the amount of lots) on losing trades. Series of losing streaks can be recovered? (including profit) from a single winning trade by using this strategy. Equally important, you'll need a virtually bottomless amount of capital to actually benefit from it, as series of losing streaks can completely wipe out your whole capital before landing an actual winning trade.
This trading strategy focuses on recouping losses by insisting your forex expert advisor on buying lower priced assets so that when price slings back up again, you'll rake up the bounty. Subsequently, this lower priced asset may keep continuing down and by average your purchase rate is averaged down. On paper, this strategy may seem very lucrative when applied to undervalued markets as you buy cheaper shares or currency units and simply do waiting games until the price moves back up again. However, when the price keeps going down without any sign of good sentiments to support it, it's just as heart-wrenching as walking on thin ice.
Chances are, you're already familiar with this trading strategy. Essentially, you programmed Forex Expert Advisor to open one or multiple positions to catch a small price movement and gradually netting-in a steady stream of small profits. One great example is HFT or Speed Trading, a highly advanced automatic trading system that processes thousands or even millions of market orders in a blink of an eye.
E. Trending MAs (Moving Average):
A simple strategy almost everyone with enough knowledge of Forex Expert Advisor can start to use. A standard version of MT4 will include an Forex Expert Advisor with trending Moving Averages strategy. Most noteworthy, a signal is generated when a slower period MA line crosses with faster period MA line.
A mixed bag o' nuts which advanced trading bots developers may prefer over the original OG trading strategies mentioned above. Be wary though, the combined strategies may bring forth unmatched profit expectancy and also unexpected risks.
Quantitative analysis isn't a direct component of an Forex Expert Advisor, but without one, it's almost impossible to develop trading bots with coherent design. In plain words, it's the blueprint for making a Perfect Forex Expert Advisor.
Quantitative analysis is basically quantified research on target markets. On top of it, what you research upon them is relative to your objective. These examples are as follows:
- Macro Economics: big impact economic updates can create high volatility for a fairly considerable period. Commonly, central bank interest rate change, NFP and GDP reports are also among those macro-economic updates.
- Fundamental Analysis: research using data garnered from revenue, data or earning release notes can be very determining if you're trading by the numbers.
- Statistical Analysis: advanced research can conjoin multiple variety of market moving aspects of researching the correlation between those variables
- Technical Analysis: indicators like Moving Average and Bollinger Bands are among the most popular method for analyzing the market. In addition, developers can research how these indicators interact with the market by producing a signal at certain moments
- Market Micro-structure: one can exploit market inefficiencies to profit from it. Notably, arbitrage.
- Mixed Analysis: any combination of aforementioned form of analysis such as combination of fundamental and technical analysis
Forex Expert Advisor is a program where a developer will try to instruct specific commands like buy or sell orders which then triggered by certain condition. Therefore, you basically “teach” an expert advisor what those conditions are, through qualitative analysis studies. Afterward, successfully instated conditions will make your robot respond accordingly to market signals.
In conclusion, you can buy or develop a fully functioning forex robot with all its basic components properly assembled. Finally, before you pick your best expert advisor, please read Expert Advisor - Buyers Beware.
Also, optimize your Expert Advisor by continually updating its rules set and also controlling risk by risk management parameters.