Saturday, April 18, 2009

The Effect of Spreads on Expert Advisors

One of the most important characteristic of any expert advisor is the effect spreads have on the profitability of the trading system. This is a matter that is often neglected by people when they are searching for an expert advisor and it is a vital issue as an expert advisor that is very sensitive to spread values will most likely fail or have a drastically reduced profitability when you trade it on the real market.

The spread, as you may know, is just the difference between the bid and the ask price of a given currency pair. This is in reality what the broker charges as a "commission" given the fact that the broker always keeps this price difference as profit. Every time you enter the market you give the broker the spread as payment.

So how do you know the spread cost and the sensibility of a given strategy to market spreads ? The first factor that affects this is the number of trades taken. If a given ea takes 1 trade each month, then the cost we have to pay for trades is very small, while the cost we have if we take 10 trades a day is quiet high. The more you trade, the more your ea is working for the broker and not for you.

The second and most important factor is the average profit in pips of each trade you take. If your ea has a fixed take profit which is less than 5 times the spread, then changes in the spread will drastically affect the amount of profit you get with each trade. So if you have a 10 pip take profit and a spread of 2, then the expert might be totally unprofitable with a spread of 5.This is specially true if the risk to reward ratio is higher than 1, that is, if the stoploss is bigger than the takeprofit since not only are you working against the spread, you are also risking much more than you make in any trade. This is a pretty unsound strategy but it is used by most of the hyped commercial expert advisors (like fapturbo, robominer, piptronic, etc).

Now pay a lot of attention to the currency pair your expert advisor trades. Most of these expert advisors that aim for small profits are now targeting currency pairs that are characterized by high levels of volatility and range trading (like the EUR/GBP and the EUR/CHF) their pip value is also higher than that of USD based pairs so the profit they can get in dollars for every pip is higher. The drawback is that this pairs tend to have very variable spreads and all of these experts are bound to be unprofitable when traded in the real market. That is a reality.

If you would like to learn about more commercial and free expert advisors, as well as experts I have programmed for our long term stable profit portfolio please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

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