By combining lots of yes/no rules into a complex mathematical model, EAs can execute sophisticated trading strategies, using computational power to make decisions – and act on them – almost instantly.
Before using an expert advisor with a real trading account, you need to know in advance the financial risk that you can afford to take.
Analysing an Expert Advisor’s stats
1) The Profit Factor
The profit factor is one of the most important statistics. The profit factor is important because it shows the relationship between profit and risk. A robot that is profitable – but nevertheless risks all of the money in your account – is not an ideal robot.
To calculate the profit factor:
Profit Factor = gross profit (sum of all winning trades) / gross loss (sum of all losing trades)
If the profit factor is less than 1, you must eliminate it immediately, choose EAs with a big profit factor.
2) Expected profit per transaction
The expected profit (Expectancy) is a statistic that tells you how much you could earn on each trade on average. As much as they are based on past trading history, which doesn’t guarantee future results, it can still help choose the best and profitable forex robot.
Expectancy is the difference between the average profit per trade and the average loss per trade.
3) The different types of drawdown
A robot that makes money is no good if it takes too much risk on each trade. Drawdown is a very important indicator of risk. It shows the percentage of maximum loss recorded since the last high point. This can give you an idea of the potential drop in your account when the robot is in trouble.
The first step to analyze drawdown is to look at an equity curve chart. A rising curve indicates that the robot is profitable, but if the curve is rather agitated with frequent and large peaks and troughs, the robot is very volatile. A volatile robot will most likely have a high drawdown and pose a greater risk. You can therefore quickly filter the robots by selecting charts that display a smooth equity curve.
Maximum drawdown simply shows the maximum loss since the last high point. For example, a 50% drawdown means that at some point the robot lost 50% of the account value from its highest point. For example, if you opened a trading account with £10,000 and started to use this EA at the wrong time (just before the drawdown), you would have been subjected to a 50% loss of your capital from the start!
The average drawdown compares the EA’s various drawdown amounts. For example, let’s say that the expert advisor had 3 drawdowns, the first 10%, the second 4% and the third 12%. To calculate the average drawdown, you just need to add the three drawdowns and divide by three (10% + 4% + 12%) / 3 = 8.7%. The average drawdown is interesting to look at because it gives you an idea of what you can expect to lose during a drawdown period, while the maximum drawdown showed you the worst case.
Drawdown recovery is an indicator that measures the speed with which a trading system emerges from a period of drawdown (in time or in number of trades). As you can imagine, it is best to choose an EA that is able to quickly return to positive territory after a loss. However, a less volatile (and less risky) robot will recover from a drawdown in a slow and steady manner, unlike a riskier robot.
4) The risk-reward ratio
The risk-reward ratio indicates an Expert Advisor appetite for risk. An Expert Advisor that uses a 5-pip take profit and a 40-pip stop loss has a risk-reward ratio of 8:1. It therefore needs a success rate of at least 89% to be profitable.
Some EAs on the market – especially the ones that scalp – have a risk-reward ratio of 15:1 and higher, which indicates that it uses a very risky strategy. A high risk-reward ratio does not necessarily mean that the EA does not make money. An Expert Advisor with a 95% success rate will still be profitable with a 15:1 risk-reward ratio, but if that rate drops to 93%, the EA will lose.
Most EAs feature options that allow you to manage risk by adjusting the maximum SL and TP, which allows you to improve the risk-reward ratio. However, you need to make back tests before changing the settings to see if the changes do not affect the strategy.
Why are Expert Advisors popular ?