Trading books often focus on the psychology of trading. They talk about the importance of confidence. They talk about knowing and documenting the reasons behind every trade. Most importantly, they talk about how to handle unexpected string of losses.
I often read articles that promote automation as a way to cure that last problem, emotional trading. That’s a half truth. Emotion in trading doesn’t go away simply because MetaTrader places the trades for you. There is, after all, a human being that owns and operates the computer. He is entirely capable of interfering with the emotionless machine, despite advice to the contrary.
It’s important to approach the subject of automation with a realistic assessment of what it can and cannot do. It is not a panacea to all trading problems. You are not going to stumble across a magical piece of software that suddenly turns your account into an ATM machine. Many of the same problems that plague you as a discretionary trader will continue to plague you as an automated trader. If you suffer from highly emotional trading performance, you should expect to continue experiencing the same problems until you address them.
EAs and strategies bring the same benefits that a solid automated system brings to a factory or office. If the underlying business model is garbage, automation will not turn a bad business into a good one. Where a solid business exists, a systematic approach can achieve spectacular efficiencies that no human could ever hope to match.
Expert Advisors offer the ability to backtest. Unfortunately for the novice, MetaTrader also offers the ability to optimize. This is where most make their biggest mistakes.
It is totally unrealistic to assume that it is possible to program an Expert Advisor, run the settings through the biggest optimization trial that the computer will handle and expect to walk away with a viable strategy. I often receive jubilant emails from first time clients showing spectacular equity curves, incredible winning percentages and a seemingly no-lose plan.
The best analogy that I can think of is Shaun the college student versus Shaun the family man. When I was in college, it was acceptable to wake up at 10 am and attend classes when I felt like it. It might not have been the optimal academic approach, but it certainly was an optimal lifestyle.
As an adult, my optimum lifestyle changed dramatically. I now have to juggle family and professional responsibilities with the leisure time that used to be so important. The optimum solution is not constant over time. It has always shifted and always will.
Markets are no different. Early in my forex career in 2006, the markets fell to record low volatilities. Day in and day out, almost nothing of consequence happened. An abnormally large percentage of my then employers’ clients were making money. They did so because the most common trading mistake around – holding onto losers until they turned into winners – always worked. One could almost bet the farm that the market would come back.
Anyone that traded in 2008, or even today for that matter, can testify that the optimal solution then is not today’s optimal solution. While backtesting certainly adds a great deal of clarity and understanding to an Expert Advisor, it does not tell the whole story. Human judgment and experience are inseparable. Knowing the mechanics of an Expert Advisor, the reason that the trader expects it to succeed and the types of market conditions that it favors are all integral to the process.