Now as I mentioned in the last two articles this applies to futures traders to and even stock day traders who use these systems as their only backing for entering in trades and getting out.
Now I am not against automated trading as it brings ease to those who work around the clock in hopefully generating returns. But, what we saw in a similar fashion was traders who would open accounts, purchase an EA from trading forums (most were the same structure different names) and then hope that it works like it did for the person who built that EA.
First, what is an EA if you're new. An EA (expert advisor) is a program capable of performing in the terminal any action following the instructions of a trader, without their direct involvement. The code is written in the EA to perform buy, sell or even add on to position functions when pre-set parameters were met.
What was the most common EA we saw that a lot of new traders would purchase?
THE HOLY GRAIL MOVING AVERAGE "SYSTEM"
It would have different names depending on the EA's author but usually, this was the main system we saw traders use on the platform.
The basic premise of this system executes trades as follows:
EA: (for example and simplicity)
1. setup to enter trades going long only on currency pairs or futures (EAs can go long and short but this is a simple example)
2. It uses the 50-day simple moving average and 100-day moving average.
3. Chart time frame it goes on to enter and exit trades is 5min
4. When the 50-day moving average crosses above the 100-day moving average it will put in a market order (go long) to enter the market on let's say 100,000 EUR/USD
5. The 50-day moving average crosses back below the 100-day moving average getting you out of a profit (hopefully)
Simple, right! Well here is where this EA runs into trouble that you don't see when looking at the seller's equity curve.
Simple moving averages are what's called a lagging indicator and usually when the market has a sharp move higher or lower it takes time for the moving averages to converge and cross over each other. So you're always going to have worse entries than you normally would just using a simple price action or breakout strategy.
They perform horribly (this is where the losses we saw came from) in sideways choppy markets. Why? Well at this time the moving averages are crossing back and forth over each other multiple times causing orders to be entered and exited quickly in small ranges where most of the time you're not beating the spread or commission each way after you get in and out.
In trending markets, it performs better. In sideways markets it absolutely sucks.
So new traders will do one of three things when profits aren't as robust:
1. They will backtest (optimize) the EA maybe adding RSI or some other indicator to help with entries/exits. This make takes several weeks to curve fit data and run multiple tests. Then when they add it back to the current market it could have changed its price action making all your hard work obsolete.
2. They will override the EA and turn it off and on when they feel the market is in a range which leads to again guessing the market.
3. They will trade larger size in sideways markets to hopefully make up the difference in returns similar to a trending market.
This is not a great way to trade.
Don't buy EA's because if the EA was so profitable the trader would shop his algorithm to a small hedge fund or CTA firm and license it out. They wouldn't be selling it for $50. You get what you pay for.
Learn price action and stop relying on others to make you money in the markets. If you're constantly just fed trade tips or systems and it goes south what do you do? Probably move on to a new hotshot trader or system that has no track record to make you rich.
I hope this series helps those who should understand from the source what we saw the most in traders having the same losing profiles.
I encourage those who want to break these habits and trade part-time to join us this Friday where one of our students will discuss how he trades the markets. If you have questions or comment below please feel free to tell us about your experience with EAs.
WEBINAR REGISTRATION: HOW I MADE 20K IN FEBRUARY TRADING PART-TIME WHILE MAINTAINING MY CAREER.