Addressing the 9 Critical Psychological Challenges When Creating and Trading Expert Advisors (EAs)

It’s well-known that many discretionary traders struggle with discipline, emotional control, and other psychological hurdles that can impact their decision-making process, particularly when it comes to entering and exiting trades. One of the widely recognized benefits of automated trading models, however, is the belief that these psychological barriers are removed or significantly reduced. Automation, after all, is designed to eliminate human emotion from trading decisions. However, the assumption that psychological challenges vanish with automated trading is far from reality.

As you delve into the exciting world of creating and trading “Expert Advisors” (EAs), it is crucial to understand that psychological challenges still exist, albeit in a different form. You must be prepared to face various mindset issues during the EA development and trading process.

This article outlines and aims to inform on nine key potential psychological challenges traders might encounter when working with EAs and offers guidance on how to navigate them effectively. Use this checklist to develop an awareness of potential issues and take meaningful action to enhance your trading performance.

1. Over-Optimization and Curve Fitting

One of the most common challenges traders face when developing EAs is the temptation to over-optimize their algorithms. This refers to tweaking the EA to perform perfectly in historical backtests but at the expense of real-world effectiveness. While an over-optimized EA may show stellar performance on past data, it often falters when faced with live market conditions, leading to frustration and self-doubt.

To mitigate this, it is vital to stay focused on each stage of the EA creation process and avoid the trap of endless refinement. Always keep in mind two fundamental principles:

• The purpose of an EA is to reliably generate profits. Once this is achieved, the next step is simply scaling the strategy.
• The purpose of backtesting is not just to validate that the settings work but to justify moving to a forward test.

2. Fear of Loss

Fear and anxiety can emerge when transitioning from testing to live trading, especially when real money is involved. Traders may worry about losing their capital or encountering a significant drawdown that tests their emotional resilience.

This fear can act as a barrier, preventing traders from taking their EAs live or increasing trade sizes, even when results suggest it is the right time to scale up. Developing confidence in your EA through thorough backtesting and forward testing is key to overcoming this fear.

3. Lack of Control

Another psychological hurdle is the feeling of losing control when relying on an automated system. With discretionary trading, traders are actively involved in every decision, whereas, with an EA, the algorithm executes trades without human intervention. This can lead to feelings of helplessness, especially if the EA doesn’t perform as expected. Watching trades unfold on your account without direct involvement can be unnerving, tempting traders to interfere prematurely.

Resisting the urge to manually override the EA is crucial. Trust the system you’ve created, as long as it is backed by solid logic and testing.

4. Confirmation Bias

Traders may fall into the trap of confirmation bias, where they only acknowledge the positive aspects of their EA’s performance while overlooking warning signs or evidence of flaws. This bias can be dangerous, as it blinds traders to potential weaknesses that may lead to significant losses over time.

Creating a set of objective performance measures, such as maximum drawdowns and key profit metrics, can help maintain a clear and rational perspective on the EA’s success. Emotional attachment to an EA that has taken considerable effort to build can cloud judgment, so it’s important to remain objective, especially when difficult decisions arise.

5. Overconfidence

Success with one or more EAs can lead to overconfidence, which is a major psychological pitfall. Traders may begin to overlook necessary refinements, substitutions, or additional testing. Early successes might lead them to believe they can expedite the process of moving an EA to live trading and scaling it, without taking the time to gather sufficient data from a large enough sample of trades.

Patience is essential when transitioning to live trading. Ensure that a critical mass of data is available before making decisions about scaling or altering your approach.

6. Impatience

Many traders expect immediate results from their EAs, which can lead to impatience. This impatience often results in premature modifications or abandonment of strategies that could have been profitable over a longer time horizon.

There are no shortcuts in trading. Allow time for your EA to demonstrate its potential over a defined period, rather than making snap judgments based on short-term performance. Regularly comparing live results to backtests over a reasonable timeframe can provide the necessary context to assess whether an EA is working as intended.

7. Adaptability

Market conditions change, and EAs that perform well in one environment may struggle in another. The psychological challenge here lies in being open to the necessity of adaptation. Some traders may hesitate to make changes or replace an EA, fearing the effort it took to develop the original model.

Consistent monitoring and having clear criteria for when adjustments are needed are vital to long-term success. Embrace the process of refinement, knowing that adaptability is essential for keeping your EA portfolio profitable in different market conditions.

8. Social Comparison

Comparing your EA’s performance to others can lead to feelings of inadequacy, envy, or frustration, especially if you perceive that your system isn’t performing as well as someone else’s. Social comparison is common among traders, but it can lead to unnecessary emotional strain unless checked.

It’s important to remember that traders are often more vocal about their successes than their losses. Maintain a focus on your own progress and the unique journey of developing a system that works for you.

9. Emotional Resilience

The ability to stay emotionally resilient during drawdowns or periods of underperformance is critical. Fear, anger, frustration, and impatience can cloud your judgment and negatively impact decision-making, including premature withdrawal of an EA. With any strategy there will be periods of under and over performance. Accepting this is critical for good long-term decision making.

Obviously, time is a great “calmer” in terms of developing not only confidence but also this acceptance. Anecdotally, new automated trades are most at risk until there is a “record of achievement”.

This is one of the key reasons why trading any new EA at minimum volume as you discover how it performs under live market conditions is vital.

In Summary

Addressing these psychological challenges is essential for success in the world of automated trading. Taking these points on board and stepping back to review where you are as many of these may creep in insidiously over time would seem prudent.

Practical steps you can take may include:

• Developing a deep understanding of your EA’s logic and parameters, so you trust the system you’ve built.
• Setting clear performance expectations and avoiding comparisons with others.
• Developing self-awareness and emotional regulation 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 that these challenges may exist is the first step to be able to take meaningful action and continue the work on yourself. Whether you ae a discretionary or automated trader, this rule is unquestionable and always the start point of long term improvement in trading decision making.

If you are interested in the GO Markets automated trading platform and strategy tester, and the education we can provide relating to this topic, please feel free to connect at mike.smith@gomarkets.com at any time.