Thinking about risk management for EAs before pursuing profits

When you run an EA, you can’t help but worry about profit margins and win rates. If the backtest results look good, expectations rise, and it’s natural to want to grow as efficiently as possible.
However, to keep an EA running for a long time, it’s essential not only to chase profits but also to consider how much you can protect your money when losses occur.
This time, I’ll discuss the fundamentals of money management for EA operation, along with concrete verification steps.

1. Start by considering the lot size from the tolerance for losses

If you increase the lot size, profits when the market moves in your favor become larger. But losses when it moves against you will also become larger in the same way.
The important thing is to think about “how much loss you can endure” before asking “how much can you earn.”

Concrete verification steps

1. Check your current account balance and usable margin
2. Take out living expenses and money you’ll need soon from the invested funds
3. Check the assets to trade, stop-loss width, profit/loss per 1 lot, and trading costs
4. Consider whether the assumed loss amount fits within your acceptable range of lot sizes
5. Set a criterion to reevaluate lot sizes when the account balance decreases

When estimating losses from stop-loss widths, actual losses may exceed expectations due to slippage and widening spreads. Do not assume losses are always capped just because you have a stop loss in place.

2. In backtests, look at more than just profits

Judging an EA solely by final profit or win rate when evaluating it can be a bit dangerous.
Even with similar profits, an EA that suffers a large drawdown midstream and an EA that moves with small fluctuations will impose completely different mental burdens during operation.

Concrete verification steps

1. Confirm the test period and the assets tested match your intended operation
2. Check maximum drawdown and how that calculation is performed
3. Check the number of trades, the streaks of losses, and the profitability skew
4. Verify that trading costs such as spreads and commissions are included in the test
5. When changing conditions or trading in different markets, confirm that results don’t collapse significantly

I try to make the backtest spread settings as close as possible to the actual account status you’ll use. If you underestimate costs, the results can look too good.
Also, there were times when the tester retained previous input values and changed results. Before looking at the numbers, cultivate the habit of first checking whether the test conditions are correct.

Past maximum drawdown is not a future loss cap. If market conditions change, losses beyond past records can occur. Do not decide future earnings solely based on backtest results.

3. Check the overall risk of the account

Even if the balance doesn’t seem to be decreasing, there can be unrealized losses in the positions you hold. Look not only at the balance but also at usable margin and the maintenance margin ratio.
When running multiple EAs on the same account, even if each lot is small, overlapping positions can increase the overall risk of the account.

Concrete verification steps

1. In MT4/MT5 account information, check balance, usable margin, and maintenance margin
2. Check the positions you hold and the unrealized profit/loss
3. Ensure risk is not concentrated in same currencies or similar-movement assets
4. Consider what happens if multiple EAs’ positions move in opposite directions simultaneously
5. Decide how to respond when margin decreases

The warning level for maintenance margin varies with broker’s stop-out conditions and trading terms. Please confirm your own account rules in advance.

4. Regularly inspect even while running

EAs aren’t meant to be set and completely forgotten. Market conditions, connectivity, and trading terms can cause things not to move as expected.

Concrete verification steps

• Periodically check account balance, usable margin, and open positions
• Review trading history for unexpected orders or settlements
• Ensure MT4/MT5 is running, connectivity is stable, and there are no errors
• Check broker’s trading terms and spread changes
• When funds drop to a pre-set level, check if you have reached the criteria to review or stop

In the scalping EA I’m developing, I display “today’s performance” and “this week’s performance” on the chart for quick verification. Every Saturday, the week’s performance and observations are automatically delivered to Discord. Being able to view it right away makes ongoing inspection much easier.

Even with stop-loss or stop features, there are occasions when severe price moves, price gaps, spread widening, or communication failures prevent settlements at the desired price or time. Having settings does not guarantee protection against all losses.

5. Decide in advance how to respond to losses

If you wait to decide after a loss occurs, you’re likely to get emotional.
Therefore, before you run it, it’s important to decide: when to stop and what to check after stopping.

For example, you could have a pre-set rule to stop new trades when a certain amount of funds has been depleted, and to review trade history and activity.
The scalping EA I’ve built includes features to stop new orders after daily losses reach a certain percentage, to pause after a streak of losses for a set time, and to reduce lot size after consecutive losses. The rules you set act as a brake that the EA applies on its own.
However, these features do not completely prevent losses. Depending on the timing of judgments and rapid market moves, they may not stop as expected.

Also, there are risks in stopping operations themselves. Decide how to handle whether to settle existing positions or only stop new orders, after thoroughly understanding the EA’s specifications.

Summary: Protect money before chasing profits

In EA operation, there is a tendency to focus on profit-increasing settings and buy/sell logic. But taking on too much risk relative to your capital makes long-term continuation difficult.
Five concrete areas to check: lot size, maximum drawdown, overall account risk, operation status, and stopping criteria. Mastering these lays the foundation of money management.
There is no absolute perfect answer in money management. The solution varies with the EA’s characteristics, operating environment, and the losses you can endure.

By confirming before running, inspecting during operation, and acting according to pre-set rules when something unexpected happens, you’ll have the best path to a long-term relationship with EAs.

Disclaimer

This article is for informational purposes and is not investment advice. There is a risk of principal loss with EA operation. Past results do not guarantee future performance. Please exercise your own judgment and responsibility.