Do Expert Advisors Work in FOREX?

Expert advisors are combinations of indicators with a small rule set for determining specific buy and sell signals. They have become popular in the past two or three years. Some EAs can be quite complex and sophisticated. Others may be simpler: "Buy only when the 3-unit moving average is above the 10-unit moving average and the relative strength index is below 50 percent." The rule sets tend to be small in number and limited to a few Boolean operators such as AND, OR, NOT, and IF-THEN.

There are many expert advisors available for sale to traders.
Are they any good? If you found a system that worked well, would you sell it for $199? Major institutions spend millions developing trading systems -- and most wind up on the scrap heap of market history before they execute a single real-time trade. Professional team programming is expensive. Three specialists at $150 an hour each might need 5,000 hours to develop a program.

Most expert advisors are tested first over a long historical data set. This can be misleading. Markets have a large number of environments and an expert advisor tested over a long time may either do well just on a small cluster of environments or the historical data used may not (in fact, probably does not) have an evenly distributed sample of all the environments. See Tools for Traders, for some of the applications of the market environment (ME) back-testing methodology, which attempts to overcome these deficiencies.

Tip: An expert advisor should not be confused with an expert system -- though the two have similarities. An expert system is considerably more complex and has additional features such as subroutine loops, so the program can, at least in theory, learn from its mistakes internally and on the fly in real time and develop a procedure for explaining its decisions.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2020. Content published with author's permission.

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