Things That We Should Aware in Finding the Best Expert Advisors
by sanzaru on 20/06/09 at 7:30 pm
With so many EA in the market todays, we should aware which EA that make profitable trade consistently. Over my experience there are some factors you should consider when choosing your EA.
Please do remember that result of backtesting solely tracked from past performance. Past performance doesn’t indicate future performance, please do note that.
The better the EA performed in the past the better it will be for us to filter. Which EA that have been through market obstacles or EA that just been released and sold with a lot of hype (quick rich). Ok, below here are some stuff that you should aware of.
1. Profit Factor
This ratio essentially shows you how much you can expect to gain for each dollar put into the account, over how much you’re at risk of losing. The profit factor is calculated as:
(profit – commission)/(max drawdown + commission)
A Metatrader EA with a profit factor less than 1 is a historically poor performing EA. The returns that it has produced do not justify the amount of risk taken on. Take a look at the table below for statistics of three hypothetical Metatrader EAs.
Table taken from http://www.thefxmarkets.com/
Simply look at the tables above. We can look at the EA 3 is performing poorly. Even though the gain is quite big compare to others EA but the loss is also bigger, not mention when you should consider the drawdown risk and commission factors.
2. Drawdown Analysis
When first analyzing the drawdowns of an EA, a good place to start is simply by looking at the equity curve. An EA with a choppy and sporadic equity curve shows a historically volatile EA; whereas a smoother equity curve shows a historically more stable EA. There are advantages and disadvantages of this drawdown.
Equity Curve – Volatile EA
Equity Curve – Stabil EA
A. Max Drawdown
· This is the largest drawdown (in percentage terms) that the EA has realized over its trading life
· This is the best indicator of a worst case scenario
· A good way to think about this is: If this drawdown occurred immediately after opening your account, could you stomach this type of risk?
B. Average Drawdown
· The average drawdown size (in percentage terms) realized by the EA over its historical performance.
· Calculated by summing up all the losses (%) and dividing by the actual number of losses.
- In most cases this statistic can be provided by your EA vendor
· The average drawdown will give you an idea of what you might typically see (on average) in a peak-to-trough cycle.
C. Drawdown Recovery
· Shows the time frame the trading robot has taken, on average, to recover from a drawdown back to a positive balance.
· A less volatile Metatrader expert advisor will often take longer to recover.
- Keep this in mind before deciding that a fast recovery is a good attribute.
- More volatile EAs often recover quicker, but this is due to large fluctuations and swings in performance.
By combining these three drawdown measures you can gain an encompassing idea of the inherent risks associated with the EA. When further combined with performance measures you will get a good idea of what to expect with a particular EA
3. Accuracy and The Win/Loss
You can calculate how accurate your EA performance by simply count how many total winning trades you have and divided it by total number of trades. But it’s very deceptive, since EA have their own method to capture profit.
Some EA are focus on lots of small winning and few of big losses or lots of small losses and few of big winning. Depended on the strategy of the EA. That’s why we enforce it by win/loss percentage. Simply calculate the average win % and loss %.
4. Expectancy of Performance
By combining accuracy and the average win/loss, you are able to calculate a measure that will help to forecast future performance. This measure is known as expectancy. You can calculate expectancy with equation below:
(Accuracy * Average Win)/((1-Accuracy)*Average Loss).
Expectancy shows you a projected average return for each trade over the life of your EA. Expectancy less than one shows that the EA historically loses more often, and is a surefire way to eliminate the robot. Each trade will of course vary on a trade by trade basis, but over the long run the expectancy is what you might be able to anticipate. Keep in mind the amount of trades taken into account when analyzing expectancy. For example, an EA with an expectancy of 4.3 may seem better than an EA with a 1.1, but if the EA with a 1.1 value made ten times more trades, it would be considered a more successful trading robot.
There are many tools to calculate how effective your EA, if you have still any other factors that you want to give me for input, please don’t hesitate to comment or email me at sanzaru@forexbreakthrough.com.
