Trading Lesson: Why EAs Are Out and Automation Tools Are In
02/13/2018 2:36 pm EST
Trading is much more about finding risk-adjusted trades using the right size, managing the trade entry, locking in profits and the right exit. That’s what you can do with an AT, writes CBOT veteran Jeff Wecker. More Trading Lessons every Friday on MoneyShow.com.
There are many reasons traders are switching from EAs (expert advisors) to ATs (automation tools). The primary reason is that EAs cannot put things into context, which is why they had no chance of catching the recent volatile moves in the financial markets.
Further, the lack of support is a big problem. EAs are generally just thrown at people for a price and they are then left to fend for themselves. ATs, on the other hand, come with a support team of experienced traders who are always there to guide you and answer questions, 24/7.
Other expert advisor problems include:
1. An inability to adapt to changing market conditions.
2. A general inability to handle range trading and trend trading at the same time.
3. Not diverse enough to handle majors and exotics simultaneously.
4. Can have major drawdown problems.
ATs eliminate all of the above problems. The best ATs, for example, have about eight variables and each one has a default value, but you can change any of them to suit your particular style or a particular market, or events such as news plays, where the best ATs have win rates approaching 80%.
The variables usually include:
1. The entry price
3. Number of times you will try to enter the trade
4. How many pips you will risk on each entry
5. How many pips will you move the entry price on each subsequent attempt
6. What percent profit will you take after you’ve reached “x” pips of profit
7. Where will you put your stop on the percent of the trade you keep and
8. Where and how will you manage your trailing stops.
So instead of blindly following hierarchical patterns or algorithms, ATs allow you to add context to your trades, which allows you in return to catch the big moves. They also control risk (5 pips plus the spread per trade), allow you to lock in partial profits quickly and move your trailing stops up to avoid giving it all back.
They solve all of the basic problems that cause 90% of traders to either fail or fail to reach their potential: they keep you patient because you can’t make the trade until the entry price is hit. They enter the trade multiple times at different points to make the market come to them. They have great risk/reward ratios (usually about 20:1) and prevent you from hanging onto losers. They lock in partial profits quickly.
They keep you in your winners with trailing stops that let the market take you out….that’s important because nobody is smarter than the market. Finally, because ATs allow you to add context to your trades, you never sit idly by and watch drawdowns waste your account away.
ATs also have the unique capability of playing both sides of the market simultaneously. They probe each wild swing in the market, taking partial profits as price gyrates in both directions. And then they latch on to the real move like “Jaws” and stay attached for the duration of a swing or long term trade, moving up the trailing stop as it goes.
EAs can’t do all of that. The moves are way too fast and have no pattern for an EA to follow. Wild moves are confusing, so to speak, for EAs because they rely on algorithms or patterns, but ATs just trade price action. ATs trade the market that is in front of them, not the market an algorithm or pattern thinks it should be.
If you are going to catch the 800 pip moves, you need to be able to play both sides of the market. Why? Because most of the time, before there is a big move in a particular direction, there’s a substantial move in the other direction. That’s the move that takes all the weak players out as the stops are run until there are none left.
Those moves are built for ATs. In fact an AT will take profits on the false move and then latch on to the real move……that’s hard to beat.
If EAs could deliver what they promise, hedge fund managers would just run EAs and head for the beach or golf course. Not the case. Trading is much more about finding risk-adjusted trades using the right size, managing the trade entry, locking in profits, and exiting at the appropriate time. That’s what you can do with an AT.
The Currencies, Coffee and Croissants group is open to all traders interested in currencies. Just contact Jeff Wecker here to join CCC.