Every day, total trading volumes of the markets spinning in favor of algorithmic or quant trading. Biggest funds, biggest banks hire more programmers and less conventional traders to their trading departments. Why is algorithmic trading gaining this much popularity so quickly? What benefits will it bring to retail traders if they switch to algorithms? How to develop or find expert advisors? In this article series, as an algorithmic trader myself, will try to answer some of the questions about systematical trading and developing one, choosing the right expert advisor. This article will be the first of many in “Algorithmic Trading Series”. 

Steps of Developing A Profitable Expert Advisor Portfolio

1. Trading Edge: Trading is not easy. You are betting against other people, big investment banks, advanced AI systems, etc., markets constantly changing, there is always unexpected news. Because of all these and many more obstacles %90 percent of traders can’t make a steady profit. The best way to earn a steady income from trading is by finding an edge that makes your trades better and more profitable. This edge can be fundamental based or technical based but it has to be realistic and thoroughly tested.
2. Systematical Trading: Rather than trading randomly, trading with a set of rules can be more efficient. These rules can vary basic like using a double top or a double bottom chart pattern, or very complex like using econometrical models to predict price targets. Most importing thing is converting our trading edges to systems so we can test them and find them easily. Even if you don’t want to use algorithmic trading, you can always use your systems to trade conventionally. If you test these systems thoroughly, they will most likely increase your long-term profitability and help you manage your risk.
3. Creating an Algorithm: After setting the rules of a trading system, the next step is turning this system into a language that programs can understand. If you are a programmer you already know what to do but if not, it is time to learn it. Meta Trader is using MQL language. It can be difficult even after you learn the basics but it is a very elastic language, you can create almost everything you can think of. Creating a system to test may take some time so if you are looking for some quick tests, tradingview.com can be an easy and free source to use while in the early testing phase.
4. Backtesting: After creating the algorithm, we can use programs like MetaTrader 5’s strategy tester to know what would have happened if you traded with this system. While backtesting, using a minimum of 4-5 years of data is essential, and if possible up to 20-25 years of historical data will improve the reliability of the system. If you don’t like the result return to steps 1 or 2 and repeat the process.
5. Optimizing Variables: After backtest, if you saw promise in this system, by optimizing variables and tweaking the system may reach its peak performance. But it is important to not using optimization excessively because this may lead to wrong results depending on historical data length. And DO NOT use optimizing to fix a non-profitable system, know that you can’t cheat the market, but the market can cheat you.
6. Follow the Plan: Now that you have an algorithmic system, it is time to trade. DO NOT interfere unnecessarily with the system and follow the plan. All systems have weak sides and will lose money in some periods. There will be a worst performance, much worse than the tests but if you test the system well enough and if you determine the lot size and risk level realistically don’t fear short-term losses.
7. Find New Systems: If you buy just one security with all of your money then you are risking everything by betting on just one thing. Markets are always changing. Trust your well-tested system it is not wise to put all of your eggs in one basket. Anything can happen. Find more systems, preferably different kinds of systems (mean reversal – trend following) to decrease your overall risk and diversify your algorithm portfolio as much as possible.

This is Too Much Work, Can’t I Just Buy Expert Advisors?

Well, of course, you can; Meta Trader has a market for trading indicators and expert advisors or simply copying other investor trades. It is really easy to buy or rent but it is also very easy to choose the wrong ones and loss all of your account balance. Here are some tips for buying an Expert Advisor.

1. Backtest Results: When you are checking backtest results always be skeptical. Always use “free demo” and test them yourself. Never trust insanely big profit numbers. If there is a signal available, use the signal for at least two months with a little account to test results.
2. Grid Systems: Grid systems mostly have good results because the price wants to reverse to mean, always. Because of almost having no losing trades and active lot-sizing, grid systems look very profitable both in backtests and in live tests. But do not trust the results too easily. Most of the grid or Martingale systems will deplete your balance in the long run. If the price will not return to mean for a long time you will have to endure account depleting losses. Always check the stop-loss rules.
3. Check Broker Settings: Before looking test at results, always check sellers’ leverage rate, spread, and swap amounts if possible. If you have a different leverage level, make sure the system works well with your settings before using it.

I am always in favor of learning and developing my own systems. I will advise you the same but if you want to buy expert advisors, you can do it on the official site of Meta Trader.

In the next article, I will try to give you some practical ideas about “Trading Edge” and how you can create a reliable system.