Traders may or may not agree that using an automated trading strategy will improve your trading results. But one cannot ignore the fact that an EA can be beneficial in the early stages of developing your trading strategy. In this article, we look at how using automation can help you to cut down on time while providing an objective analysis of your trading system.
When it comes to Expert Advisors, traders can be broadly distinguished into two groups. The first group which believes that the markets can be traded consistently by automation, where it is possible to take advantage of some recurring patterns and thus be able to build a mechanical system. And then, there are traders who believe that discretion based trading offers more consistency in making profitable trades.
An expert advisor or a bot can be used to either inform the trader of a potential trade or it can also execute the trade automatically without any human intervention. The biggest argument for using an expert advisor is that it removes the emotional factor from the equation. It is said that an EA can perform better than a discretionary based trading approach for the fact that the automated trading strategy is based on logic and not emotions. Secondly, an EA is also said to be less time consuming and can identify more opportunities. With an EA, a trader doesn’t have to be stuck to their trading screens.
No matter which camp you belong to, the fact remains that automation or expert advisors form a big group in the trading environment.
There are different ways to use an EA, even for those who base their trading decisions based on discretion. In fact, a semi-automated trading strategy can offer the advantage of both using discretion to execute the trades while also pointing to potential trading opportunities.
Here’s how you can use Expert Advisors to improve or evaluate your trading strategies.
Using EA’s or Indicators in your trading strategy
Firstly, the word ‘Indicator’ is not to be confused with a moving average or an MACD indicator. By indicator, in the context of EA’s is a tool or a piece of code that indicates you to potential trading opportunities based on the conditions of your trading system.
An example of such indicator could be one which alerts you when there is a bullish or a bearish moving average crossover. This can be greatly beneficial when you want to visually backtest your trading strategy, set up a stage that comes in quite early in the development of your trading system.
By starting out with this simple indicator, you can visually check on how your trades would have performed if you simply bought and sold at every bullish or bearish crossover.
Using such indicators can be greatly beneficial especially if you are trading with price bars or candlesticks. For example, it can be exhausting to visually plot inside bars. However, by using an indicator that automatically plots inside bars can help you to save not only time but also removes any bias.
The following chart illustrates this. On the left is the inside bar indicator which colors the bar ‘Magenta’ when an inside bar is formed. On the right is a plain bar chart. It is easy to see how using the custom indicator can help you automatically focus on the next steps in your trading strategy, as compared to visually plotting the inside bar formations without using an indicator.
With the major part of the strategy done with, which is identifying the set ups, traders can now simply focus on testing how they can execute the trades.
Notice that despite using the custom indicator; traders can still retain their discretionary models in their trading strategy.
Another way to use an expert advisor is to actually code up your entire trading strategy. Having the EA to run a backtest can help you to initially identify the potential in the trading strategy. A trader can then go into the details of evaluating individual trades and thus be able to fine tune their strategy by adding new filters to improve the trading performance or even employ position management into your trading strategy.
Some might call this as curve fitting, but as long as you do not fall into the trap of over-optimizing your trading strategy, it can be beneficial in removing the weak links in your trading system rules or logic.
Using automation to build screeners
Automation can also help traders in building their own instrument screeners. For example, it makes more sense to have a dashboard indicator that alerts you to a trading setup or a signal than having to manually check the charts every day or after every intraday session. It can also help you to screen different times frames as shown in the chart below.
The trend automation screener, for example, combines various indicators to show the overall trend. As obvious from the above screenshot, the automated script can help traders to spend more time in looking at potential trading opportunities than having to look at each of the instruments or move across different time frames.
To conclude, while you may or may not agree with using an automated approach to trading, the fact remains that making use of automated indicators or scripts can help you at the very least to cut down on the more recurring or mundane tasks while developing your trading system.