Perspective from an EA Creator:What to do when drawdown occurs


Perspective from an EA Creator:What to do when drawdown occurs.

Finding an EA that seems to be performing well and purchasing it, only to experience drawdowns shortly afterward, is a common occurrence.

I’ve personally experienced this pattern with over half of the EAs I’ve purchased in the past. Even developers can’t accurately predict forward test results.

Based on my experience of creating over 100 EAs, confidence in an EA only comes after observing its forward results.

Now, let’s consider the potential causes of drawdowns:

Case 1: Lack of Logic Advantage
This occurs when optimization of backtest results leads to a lack of logical advantage.
Imagine a treasure hunt game where the goal is to collect as many treasures as possible along different routes. The best-performing route may not have a solid basis.
If the route was chosen based on finding patterns where treasures are located, there would be a logical basis. In the case of EAs, this often involves technical indicators.

Case 2: Simple Drawdown.
In such cases, continuing to operate the EA can lead to improved performance over the long term.

Case 3: Logic Becomes Obsolete
This is the trickiest situation.
An EA that performed well suddenly stops winning.
Possible reasons include:
Pattern 1: An EA with low inherent advantage performs well due to market conditions during backtesting and forward testing.
Pattern 2: Increased user adoption erodes the EA’s advantage.
Pattern 3: Over time, the market and strategy no longer align.
Making judgments in these cases is challenging. Even EA creators may not fully understand the reasons behind sudden changes in performance.

While I can’t guarantee it will be helpful, here’s my approach when running EAs:

Consider the EA’s strengths and weaknesses in different market conditions.
Predicting market direction (up or down) is impossible, but assessing volatility is feasible.
During highly volatile periods, focus on EAs that excel in such conditions. In calmer markets, consider counter-trend strategies.
In conclusion, here are some strategies for dealing with drawdowns:

Stop Trading: If drawdowns persist, consider halting EA operation.
Reduce Lot Size: Lower the lot size temporarily to assess the situation.
Review Parameters and Currency Pairs: Revisit parameter settings and consider changing currency pairs.

I hope you find this investment advice useful!


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