What are the Potential Dangers when using Expert Advisors?

While Expert Advisors (Metatrader) and other automated trading programs clearly represent a huge step forward in the world of trading. There are also several reasons to take a considerable degree of caution when using Expert Advisors to trade the financial markets. By taking a sensible approach to the use of Expert Advisors they can become a powerful tool in your trading arsenal.

Today I’m going to outline some of the things you should be wary about when using an Expert Advisor or other automated trading program. 

Backward Optimization  
Many Expert Advisers or other automated trading programs that are sold to the public or created and refined by yourself look better than they actually are. Take a claim about the performance of a particular program or Expert Advisor such as the program having reported a 230% return over the last six months. Digging deeper into the statistics may reveal that this performance only holds up when applied to one particular currency pair. Such reported results can be even more misleading if the currency pair has been on a long term rally, as a simple long biased indicator would perform brilliantly in these circumstances. So when either purchasing, using and testing try to determine how the program or expert advisor will perform in a variety of different market circumstances. 
Correlations Breaking Down 
You may have a created or bought a successful Expert Advisor and it in fact it may be even making you a nice handsome profit, but there is always a danger that the correlations that have made the Expert Advisor profitable will breakdown. While you might think you will be able to recognize when the correlations behind the workings of your EA breakdown this is not necessarily true. It could be perfectly possible that your Expert Advisor had just run into a unlikely but perfectly possible patch of performances. How can you avoid such a problem? By understanding the workings of the particular program you are using to automate your trades, you can collect data and check and see if the assumptions behind the Expert Advisor still hold. When this data shows that the assumptions behind your automated trading program don’t hold it might be a good idea to abandon or at least put it on the back burner until the relationship returns. 
Black Swan Events 
A Black Swan event is essentially an extremely rare event, recent financial research has shown that these Black Swan events occur much more frequently than financial models take into account. While most programs have a clear get out when such an event happens (namely Stop Losses). There is still the problem that trading in such conditions may lead to your trading capital being significantly depleted. The key is to get out of markets when they may be undergoing a Black Swan event which your Expert Advisor may not be equipped to deal with. In practice this is much harder to do than first appears, but hopefully you will never have to experience such an event. It would be somewhat paradoxical to tell you to be aware of the unexpected. 


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