Algotrading and trading advisors: their pros and cons

We exist in a time where many things are controlled by machines. The professional trading makes no difference. In this article, we will talk about Expert Advisors and algorithmic trading.

It all started with the invention of computers in the 20th century, first programmed to help in mathematical calculations. Since then, information technologies have been developing rapidly, computers have become more powerful, complex, and fast. Then came the Internet. It did not take long for banks, institutions, and people to understand how technology could be useful in making a lot of money.

The first algorithmic systems were software for drawing charts and trading, which helped to facilitate price research and order execution. Eventually, they turned into full-fledged trading platforms, which made the work of a trader easier.

What is algorithmic trading? Let us first define the automation of trading in general. Trade automation is a trading activity, which is fully (or partially) performed by the software. In other words, with the help of trade automation, all or some trading tasks are performed by a computer program instead of you.

There are several ways to automate trade activities, the main of which are:

Social trading is based on a social platform where traders can share their trades and other traders can track and copy them.

Expert Advisors are software programmed to perform actions in response to certain triggers. You can download free EAs, buy paid EAs, or create your own.

Algotrading has many advantages and disadvantages. Some traders manage to make large profits with the help of algorithmic trading, but this method of trading is not suitable for everyone.

What is a trading advisor?

A trading advisor is a software that performs trading tasks on behalf of a trader. In other words, an Expert Advisor is a program that you can buy or create yourself. Expert Advisors are also known by such names as Expert Advisors or trading robots.

Algorithm trading and trading robot

Algotrading and Expert Advisors are directly related to each other, as they are based on technical analysis, mathematical models, and statistics. Expert Advisors are ideal for performing tasks that respond to specific triggers. In algorithmic trading, triggers are defined by rules and values obtained as a result of technical analysis of price movements. For example, a rule can be an indicator signal that reaches a certain value. If this rule is executed, a buy or sell order is sent.

Some trading platforms allow you to install third-party Expert Advisors and some allow you to program your own. The MetaTrader trading platform and MQL4 language are especially popular in this respect.

If you want to expand your knowledge about trading robots and algorithmic trading, visit the MQL4 section where you can find articles on creating and programming your own Expert Advisors.

Tasks that can be performed using algorithmic trading

Let's look at examples of tasks that can be performed using Expert Advisors. There is a widespread belief that Expert Advisors are only used to open orders. However, in fact, making transactions is only part of automated trading and you can see this in the following examples. So what can be useful for a trading robot?

Performing technical analysis. With an Expert Advisor, you can perform mathematical calculations. All these calculations are designed to understand and predict price movements.

Sending notifications. You can program the Expert Advisor in such a way as to receive notifications about price changes or market events.

Creation and sending of reports. The Expert Advisor can create and send automatic reports. For example, if you want to receive a daily report on your trades and the status of open orders, you can create an Expert Advisor that will send you this information.

Trade by the news. This may be difficult to program, but it is possible. An advisor can read the news feed and understand what is happening, then notify you of these events or react in a certain way.

Make trades. A trading robot can execute orders on your behalf and without your participation.

Modify open orders. The advisor can be programmed to modify existing orders. For example, for a trailing stop if you want your stop loss to move when the price moves in the right direction.

Stop trading. You may need to stop all your trading activity and close all orders in response to certain market events and the Expert Advisor may do this for you.

The complexity of a trading robot may vary depending on the tasks programmed into it.

Pros of Algotrading

There are several reasons why it would be convenient for you to use algorithmic trading and automate your trading:

To free up your time. This is probably the most important reason why you may want to automate your trading activities. We are all constantly busy, and time is the most valuable resource we have. If you trade manually, you may want to have more free time to do other things rather than trade. Algotrading allows you to perform many tasks without your participation.

Speed of trading. The computer is much faster compared to us to perform all the calculations. In a fraction of a second, an Expert Advisor can examine price movements over the last few hours or even months, compare them to some rules and open a trade, while a trader would need minutes or even hours to do so.

Testing on History. A trading robot can be tested on historical data. It is a powerful tool for testing any strategy. Testing on the history will allow you to see how your strategy and Expert Advisor work in the past. It gives you an opportunity to understand how they will work in the future. With history testing, you can also detect errors and aspects of trading that you can improve.

Trading 24×5. You can set up a server that will be connected to the internet and ready to trade 24×5 hours a day, 5 days a week. This is especially useful when trading forex, as the market is open 24 hours a day, 5 days a week.

Forex trading psychology. One of the most important skills for a trader is discipline. As we all know, discipline can be influenced by many factors. A trading robot cannot be influenced by the lack of discipline, the Expert Advisor itself is a discipline by definition. Trading robots follow only the rules that are prescribed for them. Think about an unclear situation in which you are not sure. Or about a trade that is not going as you expected, and you closed it because of panic. None of this can happen to an expert. An EA always trades by the rules and never deviates from them.

Algotrading can certainly help to improve your trading and will make it psychologically easier for you to trade with a larger deposit.

Cons of Algotrading

I emphasized the benefits of automated trading, but it is also important to understand that there are also certain risks and limitations. Here are some of these risks and limitations:

If your EA contains errors, your funds may be at risk. Fortunately, testing on your history and demo account will help you detect errors in advance.

Unexpected events in the market. You can program your Expert Advisor to respond to certain triggers and events, but there may be unexpected situations in the market that you could not foresee, in which case your Expert Advisor may get into a drawdown.

Restriction in programming. A trading advisor can perform technical analysis, but some action price models, charts, prices, and trends can be very difficult to translate into mathematical functions and comparisons. Improve your skills as a programmer and you will be able to perform more and more tasks.

The software has the potential to risk your money, so always follow strict risk management rules when creating your EAs.

Trade automation certainly has some drawbacks, but when used correctly, its benefits are definitely outweighed.