What is an Expert Advisor?
An Expert Advisor is a piece of software written specifically for the MetaTrader Platform. An Expert Advisor can just advise traders which trade to make or can be programmed to automatically execute the trades on a live account.
Expert Advisors are very flexible pieces of software that can take any information into account that is available on the MetaTrader platform.
They are written in their proprietary programming language called MetaQuotes Language Version 4.
Why Are Expert Advisors Popular?
There are few things more attractive than having your money make money for you. Naturally, this would happen if your invested capital in the market was being used to open positions and the gains were either withdrawn or used to open eventually larger positions that could potentially make even more money for you. With an expert advisor, there are often a handful of simple binary rules (yes/no) that trigger a trade to open and/or close.
Combined with the appeal of passive investing are the bold claims made by creators and marketers of expert advisors. Because of their small slice of the retail investment world, the regulatory control has failed to cover Expert Advisor marketing. However, over the years, we've seen an aggressive push of Expert Advisors that offer to sell a system with returns that would make hedge funds envious for a small fee of usually a few hundred dollars.
If that doesn't pass the smell test to you, it does not to us either.
What Warnings Should Traders Beware?
Remember that there is no such thing as a free lunch and that Hedge Funds have shut down at near record pace this year because they are unable to beat the indices which have averaged less than 10% per annum on an inflation-adjusted basis.
If the Expert Advisors delivered what many claim to deliver, hedge fund managers could put their funds to work in an Expert Advisor and all their concerns would be fixed. Alas, it's not this easy. Trading involves finding risk-adjusted trades with an appropriate trade size, managing the opening trade well, and closing the trade at an appropriate time.
It would be easy to look at the rise of quantitative funds and high-frequency funds and think that Expert Advisors are a derivative of these advanced funds, but often their execution and rules are far too simple to be in the same game as the professional systems that have risen to fame.
Traders should beware that the promises of these systems are not under regulatory control, and therefore the claims often try and strike a balance of hope and credibility. There are some good systems out there, and we have witnessed traders achieve year over year gains using systems that trade automatically, but their returns are more in line with high-single/ low-double digit returns as opposed to the astronomical returns that some Expert Advisors claim.
Here as ever, buyer beware and don't hesitate to trade the expert advisor on a practice account for a few months before letting real capital be managed by a robot.