What makes a good expert advisor and how can we define some benchmark parameters beneath which we should not fall ?
The majority of the asset management industry runs on the understanding that your only job is to better the benchmark relevant to the fund you currently manage. For example the MSCI All Country World Index is a very well known benchmark chosen by a host of companies looking for a suitable benchmark to track.
What if we applied the same logic to understanding what constitutes a good EA ? If the idea is sound, then our first step will be in establishing a benchmark against we will compare ourselves.
As there is no such ‘MSCI Good EA’ benchmark we will have to create our own, so here goes.
Ideally I am looking for a minimum of a three to one ratio after all transaction costs, slippage and spreads, this gives me some leeway when live trading conditions turn out to be different from test.
Whilst many people do not look at win rate I do. I like a rate between 35%-55%, the lower level representing longer term more old fashioned trend following systems, the higher figure a more impulsive shorter timeframe EA looking to take what the market can offer and close out.
Why I look at win rate is that I often get sent trading statements with win rates in the 70% and higher category. Nothing is impossible, especially in FX, but most of the systems, look great on paper, but in fact are nothing more than risk harbourers which like a ticking time bomb will explode sometime in the future. Better to take your risk every day and have a lower percentage win rate.
That’s it. Let’s not over complicate things.
As a starting point you don’t need more than this, profit and Loss, coupled with the win rate can normally tell you enough about the method and certainly to get you going in test.