Expert Advisor Scams and How Forex Traders Can Avoid Them

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An expert advisor can be described as the ultimate trading robot, which continuously monitors markets and makes series of trading decisions for the trader. A legit Forex EA will yield a lot of money for the trader, while fake EAs will plunge him/her into financial ruin. There are many strategists who are building their special EAs that perform special trading tricks to yield results that may look good when they are actually fake. There are various ways of spotting fake expert advisors. This article will extensively look at them.

Watch my presentation on video or read the article below:

How to spot Expert Advisor scams:

  • Check maximum drawdown reported in the backtest report of the automated trading system;
  • Check if the lot sizes are increasing. There is likelihood the strategists are using martingale trading style to recover from losses.
  • Check if the Forex robot uses the grid style of trading, whereby there is a lot of buying and selling at the same time. Such a strategy exposes the account into a lot of risks and should be avoided.
  • Check if Forex EA closes the trades in a matter of seconds. Such trading bots are using scalping strategies and they mostly do not work on any other trading account because they are very sensitive to Spread changes;
  • Check if EA uses stop loss. Expert advisors which do not use stop loss cannot protect traders from losses and are therefore not worth checking out.
  • Check if trades are held open for a long time. EAs that hold strategies for a long time or those that close trade in seconds (scalping strategies) often produce great equity curves, but have no real applicability in real trading.

Which types of Expert Advisors you should avoid

First, let’s talk about the types of Expert Advisors and trading strategies that you should avoid. Expert Advisors are very important when it comes to automated trading. Many people have been led to financial ruin simply because an EA lacked a tiny bit of detail. Every detail discussed in this article is very important and should be taken into key consideration.

Avoid strategies with extremely high drawdown figures

Consider this backtest:

The diagram represents a strategy report

The diagram represents a strategy report

For most people, this is an excellent trading strategy. However, despite having an upward equity curve and a 99% modeling quality (most people judge strategies by these two by the way), the results are far from good. This is indicated by the drawdown, which is at around 31% – a very high amount to lose. Even worse, the relative drawdown is at 93%. In live trading, this strategy would not survive as indicated by the relative drawdown.

Many traders are fooled by backtests simply because they do not know where or what numbers to look at.

The equity curve may fool beginner traders or professional traders who have just embarked on a journey to ultimate trading using expert advisors, but for an expert this backtest has not been done well.

Let us examine the trading period from 2003 to 2015, which is approximately 12 years. To get the total number of trading weeks, the years are multiplied by 52 to get 624 weeks of trading. The total number of trades shown over the 12 year period is 111.

Now, if the total number of weeks (624) is divided by the total number of trades (111), we get 5.6. This simply means that it took an average of 5 to 6 weeks to get one successful trade using this strategy for over twelve years.

This investment is not economically sound since a good EA is expected to work continuously to get as many trades as possible. Yes, it makes sense to have fewer trades if they are very accurate but consider this. Do you truly think you’ll use a Forex EA for 12 years especially with an expected drawdown of 93% which is determined by the above backtest? Of course no.

Recommended read: How do Forex Robots Work on MetaTrader

Now, let us look at the lot sizes to properly explain the flawed nature of this backtest.

Avoid strategies with impossibly high lot sizes

The trades begin with 0.44 lot sizes and then they continue to 8 lots. Once the strategy gets its first successful trade, the lot sizes shift again to a very small number and then shifts to lot size 8. Then they jump to size 43. What is shocking is that the lots keep increasing- they go to 200, to 900 and then they settle in thousands. No sane broker would allow his/her clients to trade with 1000 lot sizes.

For it to be even possible, the trading account should be extremely big for it to be able to execute such trading positions. In a nutshell, this backtest looks good in its equity curve, but in reality, it is complete nonsense.

So, extra precaution should be taken when dealing with strategies that double their lot sizes. The reason why tricksters use large lot sizes is to survive the strategy tests and to make their strategies look good on the screen.

The diagram represents strategy with large lot sizes

The diagram represents strategy with large lot sizes

Avoid strategies that long open trades for insanely long periods

Furthermore, strategies that hold trades for long periods of time are not good. There are traders however who argue that they trade for the long-run, which is commendable.

Long-term trades cease to make sense when they last for several years. They should last for several weeks or months at most before they are closed.

From the example below, one trading strategy lasts for 1287 days, which is approximately three and half years. Logically speaking, who would ever hold a single trade for more than three years?

Exactly, no sane person would be patient enough to hold a trade for three years when there are so many trades that could be made over the same period.

It could be assumed that the owner of the strategy does not want to lose any trades and wants to have as many wins as he/she can possibly have, even if they are outrageous.

There are other extreme trades that last between 300 to 900 days.

Before adopting such a strategy, you should ask yourself: why hold on to a strategy that promises yearly returns when you can have as many trades as you want in the same timeframe?

The figure illustrates a strategy that holds trades for long period of time

The figure illustrates a strategy that holds trades for long period of time

To further highlight the issue of long-term trades let us look at a trading report below:

The figure illustrates an equity curve with many drawdowns

The figure illustrates an equity curve with many drawdowns

When you properly look at the equity curve, you see that there are many drawdowns (pointed by the red arrows). The drawdowns represent trade positions that have been held for a long period and then ended up in losses. As much as the strategy gains profits, the number of drawdowns is high.

Furthermore, the track record of the account is not verified. This could mean that the strategy is fabricated. Honestly, would you wait for that long and hold your losing position when you know that they may end up in losses?

Recommended read: How to Create Forex Robot (Old Way vs. New Way)

Avoid scalping strategies because they are very sensitive to Spread changes

What about scalping strategies? Aren’t they among the most popular expert advisors?

It is true that they are popular as evidenced by the number of people who use them to scout for popular markets. The problem with scalping strategies is that most of them do not work.

You may be fooled by the good-looking trade results, but like other strategies, they can be easily fabricated to produce results that may entice traders.

Furthermore, scalping strategies are very sensitive to price changes. So, they usually do not work on most brokers.

If a scalping strategy manages to work on one broker, then there is a high likelihood that it will fail to work on another broker. In fact, if the strategy was to be used again by the same broker, there is a high chance that it will also fail.

Take a look at the duration of the trades in the example given below:

 

The figure represents a scalping strategy

The figure represents a scalping strategy

The duration of most trades is zero seconds. The Pips are ranging in the hundreds in just zero seconds and the average holding time is between zero and three seconds. This is completely insane. It is doubtful that this strategy works in any real trading besides the demo account that it originated from.

Avoid strategies with enormously large stop loss

Strategies with huge stop loss should also be avoided unless you protect your MetaTrader 4 account (MT4) with Equity Sentry Expert Advisor. Stop loss is basically the ability of a trading strategy to completely halt trading positions as soon as they start making losses. So, imagine a strategy that does not use stop loss and the financial ruin that awaits a trader that uses such a strategy.

Consider the example below:

The diagram represents a strategy that does not use stop loss

The diagram represents a strategy that does not use stop loss

The trading period begins in 2013 and runs for a year. The equity curve is great and it goes on and on for several months and then suddenly collapses.

Look at all the losses the account made, these surely wiped out most of the gains made in the whole year.

As it is evident, there was no stop loss in any of those losing trades.

Some people may argue that they do not use stop loss because they use hidden stops. If that is the case, then why don’t they use hard stops as well?

Hard stops might be set to be two or four times bigger than hidden stop loss but in a case Internet connection issue you would not lose more than a hard stop loss. This way you have higher chance of controlling losing trades while using hidden stops and hand stops at the same time.

Why would anyone consider using strategies with no stop loss if they pose such a heavy risk to his/her gains? There should be some level of protection at least against losses, even if it is just 50% of it.

So if an EA does not offer hard stop solutions like protection of the account’s equity, disabling Autotrading and closing the trades, then it should be discarded.

Avoid grid trading Expert Advisors

Lastly, there are those strategies that use grid trading style – this style involves making lots of buying and selling trades at the same time with the aim of making huge profits. Making numerous buy stops and sell stops at the same time exposes the account to very high risk and a step closer to disaster.

Below illustrated how pending orders are placed in a grid having multiple buy stops and sell stops spread in equal distances from each other:

The figure illustrates the grid-trading style

The figure illustrates the grid-trading style

Even though I’ve heard some success stories with grid trading Forex robots I would not put my real money into this. It’s more like gambling, not trading.

Protecting your MT4 account with the Equity Sentry EA

Equity Sentry EA (or ESEA for short) is an add-on for the MT4 account. It protects trading accounts by monitoring account equity/balance and open trades.

Equity Sentry EA will activate ‘security trigger’ if:

  • Equity/balance reaches or drops to a certain level;
  • Open trades (floating loss/profit) reach a certain level;
  • Closed trades + open trades reach a certain level. ESEA can also look into the history of the trades and calculate cumulative profits up to the end of the closing trades;

To save your account capital EA will:

  • Close all trades/orders (Hard Stop);
  • Disable all EA to prevent them from trading (Close & Stop);
  • Close MT4 terminal completely;
  • Send email alerts and MT4 Mobile notifications. This allows the user to get instant alerts of what is happening in his/her account;
Equity Sentry EA package

Equity Sentry EA package

How Equity Sentry EA protects MT4 account

Imagine a situation where you are witnessing your EA making trades. Then all of a sudden all the open positions start yielding drawdowns. In a matter of seconds, the drawdowns drop from 10% to 15% to 30% and so forth until almost all the money is wiped out. You will be forced to stop the trading and withdraw the remainder of the money.

Again, imagine a situation whereby you are not present during the trading – maybe you are sleeping through the night or maybe you are running some errands. Assume you are not available and your account is losing money in seconds. How would you react when you log in to your account and find zero balance? What worse could happen is that you could even find negative balance in your Forex trading account. You may also need to pay back your broker to clear the negative balance!

Equity Sentry EA is designed to protect you from such losses.

It allows you to set the equity limit or balance level that should not be passed.

For instance, let us assume that a trader has $10,000 in his account and wants to regulate his losses so that the minimum equity does not fall below $7,000. He may set his ESEA to closely monitor his trading balance.

In case the balance drops down to the set minimum balance, the ESEA responds by closing all trades, disabling all trading and even closing the MetaTrader 4 platform completely. So, assuming he was not around when this was happening, he will automatically know that the account shut itself down because it had reached the minimum balance (or maximum drawdown).

Equity Sentry EA can also be used to set trade goals.

Let us say that your trade goal for the day is 1%. Once you set it, the ESEA will respond by closing all trades and disabling everything as soon as the open trades reach the 1% threshold. Kindly note that the account does not go back to trading the next day until everything is properly reset.

Most people lose money because of continuous trades that cannot be monitored. By inhibiting trades and putting limits, ESEA reduces the likelihood of drawdowns.

Equity Sentry EA also allows you to filter trades according to various specifications such as by currency pair or magic numbers. It has very many uses. Traders should therefore fully adopt Equity Sentry EA for their MT4 accounts if they want to maximize their profits, while at the same time reduce the high risks associated with forex trading.

Below is an example of the Equity Sentry EA attached to the MT4 chart:

The diagram represents an account protected by equity sentry

The diagram represents an account protected by equity sentry

Equity Sentry EA can also close all other Expert Advisors on the same MT4 account which makes it even more reliable equity protection software. When ESEA stops your account from trading it really makes everything stop including any strategy.

Equity Sentry EA can even change your MT4 master password which would cut-off any account manager and remote trader from adding any new trades.

Equity Sentry EA is truly a #1 tool for protecting MT4 accounts.

Conclusion

Many trading strategies rely completely on expert advisors (EAs), which can basically be described as ultimate trading robots that monitor markets and make trades for the traders. Poorly constructed Forex EAs lead to poor trading results. Many sellers have come up with ways of manipulating EA reports to look good in order to dupe traders into buying them. There are ways of knowing if the strategies are real or fake. Be prepared to analyze every trading robot you find and protect yourself from Forex scams.

Have you ever been scammed by Forex robot sellers?

About the author

Rimantas Petrauskas

First I am a father, a husband and then the author of the book “How to Start Your Own Forex Signals Service”. I am also a Forex trader, a programmer, an entrepreneur, and the founder of ea-coder.com Forex blog. I have created two of the most popular trade copiers and other trading tools for MT4 that are already used world wide by hundreds of currency traders.

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