Forex EA

What a forex EA does day to day

An EA is attached to a chart of one currency pair and one time frame. From then on it runs the same cycle again and again. Many EAs run it on every new price tick. Others wait for a bar to close, which is calmer and easier to test.

• Read. It gets the latest prices, the indicator values it needs, the time and the state of the account.
• Decide. It tests its entry rules. If a trade is open it tests its exit and management rules too, such as moving a stop.
• Check. It checks the guard rules: the spread is not too wide, it is inside its allowed hours, it has not hit its daily loss limit, and the margin is enough.
• Act. It sends an order, changes one or closes one. The broker may fill it at a different price from the one it saw. That gap is slippage.
• Record. It writes a line to the platform log. That log is how you learn what it did and why.

Most of the time an EA does nothing. A bar closes, the rules say no, and it waits. A quiet log is normal. A silent EA is a different matter, and installing an EA lists the reasons one does nothing at all.

The parts of an EA

Every EA, however it was made, has the same five parts. Knowing them lets you ask the right question about any EA you read about.

• The signal. The rule that says enter. A moving average cross, a breakout of a range, a level of an indicator.
• The filter. The conditions that stop the signal acting: wide spread, news time, a quiet session.
• The sizing. How big each trade is. A fixed lot, a percent of the account, or a lot that grows after losses. This part sets the real risk, as the expert advisor page shows.
• The exits. A stop loss, a take profit, a trailing rule, a time limit. Without a stop, the worst case has no limit.
• The guards. Daily loss limit, maximum open trades, a switch that stops it all. These are the parts that matter on the worst day.

What a test of an EA must show

A picture of a rising line is not a test. A test of an EA is a list of facts, and each one can be checked. The backtesting page gives the steps. For an EA the list is:

• The period and the pair, and how many trades it made. A hundred or two trades is a small sample, and the result can move a lot with a few trades.
• The costs used: spread, commission, swap and some slippage. A test with none of them describes a market that does not exist.
• The worst drawdown, as a percent of the account, and how long it lasted.
• The largest position the EA ever held and the largest single loss.
• A result on data the settings were never tuned on, which is the point of forward testing.

Worked example: the same EA, five cost levels

This is a made-up EA, not a real one. Over 200 trades, 45 percent win 30 pips and 55.00000000000001 percent lose 20 pips. The gross result per trade, before any cost, is the sum of each outcome times its chance.

Now take off a made-up cost per trade, which stands for spread and commission together. The same 200 trades give very different results.

At 0.0 pips a trade the EA shows 500 pips. At 2.0 it shows -100. At 2.5 it shows -300, so the whole edge is paid out as costs. Nothing about the signal changed. Only the cost line did. This is why a test with no costs, or costs lower than the real ones, can make a weak EA look strong. The spread page shows how wide a spread can get at quiet or busy times.

How forex EAs fail

• Costs larger than the edge. As the table shows, a small edge and a frequent trader are a poor mix. The costs are the one sure thing in the test.
• Tuning to the past. An EA with many settings can be adjusted until the old data looks smooth. That is overfitting, and the live result is then usually worse than the test.
• Look-ahead in the code. A rule that quietly reads a bar that was not closed yet gives great tests and no live trades like them. See look-ahead bias.
• Ladders. An EA that adds to losers or doubles its lot wins often and loses rarely and large. The martingale page shows the exposure.
• Changed conditions. Spreads widen at rollover and around news. A market that trended can start to range. The rules do not adapt unless they were written to.
• The machine goes off. A sleeping laptop or a lost connection leaves open trades unmanaged. Stops held on the broker's server help. A rented always-on machine is covered under forex VPS.
• Trusting the settings of someone else. A lot size chosen for another person's account is not yours.

What this page does not tell you

It does not say any forex EA makes money, or that none do. All numbers above are made up. It describes the parts and the checks, not any named product, and your platform, pair and costs will differ.