Addressing the 9 Critical Psychological Issues When Creating and Trading EAs.

Addressing the 9 Critical Psychological Issues When Creating and Trading EAs.

Creating and trading Expert Advisors (EAs) as you move into the exciting the world of automated trading can pose various psychological challenges.

This brief article explores some of these issues. Use these as a checklist to help you not only develop awareness of what your challenges may be but also to be able to take meaningful action to improve ongoing performance.

  1. Over-Optimization and Curve Fitting: Traders may struggle with the temptation to over-optimize their EAs to fit historical data perfectly. This can lead to EAs that perform well in back-tests but fail in live trading, causing frustration and doubt. Focus on each stage of the EA creation and trading process is critical, including that of keeping in mind the TWO key rules in your decision-making to guide when it is time to draw the line under an EA development and move to the next stage. These are: i. The purpose of an EA is to reliably profit. Once in this situation, it is simply a question of scaling. ii. The purpose of a backtest is not only to provide evidence that settings may contribute to the above purpose but, most importantly, that of justifying a forward test.
  2. Fear of Loss: Trading EAs can trigger fear and anxiety, especially when real money is involved. Traders may be afraid of losing their capital or experiencing a drawdown that tests their emotional resilience. This may be a barrier to either moving to live trading or when doing so, scaling position sizing upwards (i.e., increasing the size of your trades) when results are suggesting it is appropriate.
  3. Lack of Control: Automated trading systems can feel like a loss of control, as traders rely on their algorithms to execute trades. This can lead to feelings of helplessness and frustration if the EA doesn’t perform as expected. Viewing the trading line on your account may be a challenge as you see individual trades move. The temptation to exit rather than let the EA do its work can be compelling.
  4. Confirmation Bias: Traders may develop a confirmation bias, where they only see the positive aspects of their EA’s performance and ignore warning signs or evidence of flaws. This can be dangerous to account capital well-being over a longer period of time. An objective set of measures that indicate success or otherwise may help instill some objectivity. The root cause of this may be an emotional attachment to an EA that has required significant effort to create and so maintaining that rationale decision-making, especially those tough decisions, may be a challenge.
  5. Overconfidence: Success with a set of or a single EA can lead to overconfidence, ignoring issues that need addressing, including EA substitution or refinement. It may be that the process which you have been following, resulting in early successes, may lead you to believe that you can quicken the process of taking an EA to LIVE trading and scaling without adhering to the patience required to attain a critical mass of trades to make such a decision.
  6. Impatience: Traders might become impatient with their EAs, expecting immediate profits. This impatience can lead to premature modifications or abandonment of potentially profitable strategies. There are no shortcuts; time for maturity of results is equally as important as cutting an EA off when there is sufficient evidence that this needs to be the case. Some comparison against backtest results over a defined period rather than day by day may be useful to have some context as to what happens to an EA over time, so maximum drawdowns, key profit metrics, and consecutive wins/losses may all be useful to keep a record of and as a benchmark for action.
  7. Adaptability: The psychological challenge of an openness to the necessity for an EA to adapt to changing market conditions is critical. EAs may perform well in certain market environments and poorly in others, requiring traders to adjust or replace them. Consistent monitoring is crucial, with not only a set of criteria that indicate when it is time to act but also in doing this recognizing that this approach will ultimately contribute to the success of your EA “book”.
  8. Social Comparison: Traders might compare their EA’s performance to that of others, leading to feelings of inadequacy or envy if their EA doesn’t perform as well as others. Remembering not only that often the successes of others may be exaggerated (after all, there are few out there who are as transparent about their losses as they are about their wins), but that the power of what you may be able to create.
  9. Emotional Resilience: The ability to maintain emotional resilience during periods of drawdowns or underperformance is crucial. Fear, anger, and impatience can negatively impact decision-making.

In summary…

Practical steps that can be taken to address these additional psychological issues, traders can include:

• Developing a strong understanding of their EA’s logic and parameters. • Setting clear performance expectations and avoiding comparisons to others.

• Practicing mindfulness and emotional regulation techniques to stay calm during turbulent times.

• Regularly reviewing and updating their trading strategy on which the EA is based, including sighting charts of trades taken and refinement of risk management strategies are always worthwhile. Consistent monitoring is vital.

• Taking breaks to avoid burnout and maintaining a healthy work-life balance.

Trading EAs do create an interesting set of challenges but, as stated previously, awareness is the first step to be able to take meaningful action and continue the work on yourself. Discretionary or automated trading, this cardinal rule is unquestionable.

Mike Smith

CEO Trader IQ