What is the value of an expert advisor?How do we put a value on an expert advisor?What is a good expert advisor?
A good expert advisor is one with a drawdown of 50 % of the yearly pips it makes(averaged out over 3 years).It should have annual pippage of at least 700 pips and a drawdown of 350 pips.
An investor could put 10,000 and expect to make 70 % per year = 700 pips *$10
If an investment in an expert advisor gives an income of 70% ,on a 10,000 account (the minimum account size used )it would give 10 times the annual interest income of say 7% =70%.In my view the expert advisor is worth 10 times * 10,000 * 0.5 (annual drawdown) = $50,000.
A really good expert advisor making $250,000 from a $10,000 account is worth around $1.8 m
Could anybody else come up with a formula for putting a value on expert advisors
I suppose you could consider what it would typically cost an investor to achieve returns by an alternative method. Anyone making those kinds of returns could probably push for 40% of profits, so an investor would be paying 100K in commissions to his trader to earn 150K each year.
To make 250K a year after costs, the trader would need to make just over 420K, and the investor would be paying 170K a year in commissions assuming the 60/40 split on profits.
After that it's down to pure marketing, you then need to think about your "ideal customer", the size of account that they're trading, and the number of potential sales. For example, do you want to attract 20 high net worth individuals with 20 million each to invest, or 400,000 idiots with 10 grand to invest. I know which Id rather deal with
On top of that there are practical difficulties to consider. If some guy only has 10K then he's not going to be able to pay out 170K up front for an annual license fee, or a couple of million to purchase the product outright, the market will only pay what it wants to pay.
Of course in reality, you wont sell, rent or license the system, because there's absolutely no need to, when you can take 30,40,50% of profits from an investor, and retain complete control of your intellectual property.
For me the value of an EA is how much you are ready to pay to get it.
If you pay $50 000 an EA that makes $7 000 a year (70% * 10 000) then even after 7 years you will globally still lose money ! Not interesting at all.
As market conditions may change quickly, your EA may be inefficient after some time. Then the client needs to get his money back from the EA in a period from 3 to 6 months max I think. Then if you consider that an average account size is $10 000 it should be 10 000 / 4 *70% = 2800.
If the EA is intended to be sold to retail traders, the average account is probably less so the price needs to be decreased according to that.
A better scheme would be to get money as a percentage of the profits and that is the common scheme for trading large accounts.
Your valuations are for mediocre EAS , one that are not consistent and ones that become obselete for changing market coditions and go into deep drawdowns.They are worth no more than the coding costs of around $400 to $600.
The ones I refer to are consistent performers and if they were to be valued for recovery of costs in 4 years, their value would be $28,000
If price earnings raios were applied and a p/e ratio of 15 was applied ,a good consistent expert advisor is worth at least $100k
Higher p/e ratios are apllied if future earnings expectations are higher due to auto/lot and effect of compounding.A p/e ratio of over 100 is more appropriate for really good expert advisors
I don't know any business that would like a ROI of 4 years.
Anyway it is just my opinion.
And if you have a good EA, you just use it on large accounts to manage other's people money. Then it is much more valuable.
As a potential buyer, how do I know your EA is the one that will consistently generate good profits?
Given you numbers as accurate, you can justify you $100K figure, but where is that EA?
Maybe by the time I have invested $100K in EAs at $100 each, I will find one that is profitable.
From a buyer point of view, risk of a bad EA will drive the prices of all EAs way down. so far I am batting 0 for about 10.
TRADING LIVE ON MY ACCOUNT WITH REAL MONEY .WATCH THIS SPACE.YOU CAN ONLY SEE IT.YOU CAN'T COPY THE SOURCE CODE OR TEST IT
YOU WILL GIVE UP AFTER 25 LOSSES OF$100 EACH .YOU WILL BE VERY TIRED
Let us assume somebody has $500k to invest and expert is like Better's expert which proved in public it can make 1,200 % profit,the expert advisor becomes priceless cause it can earn $5m in a year
What is it worth ? $1m
Let's consider that Better's EA is a "proven EA" (that could be discussed but it is just for the sake of the example).
If it is worth a lot, anyway retail traders cannot afford it and professional will not buy an EA. The will buy a service for managed accounts.
My point being that you cannot sell an EA for a high price because people ready to buy EAs are not ready to invest a large amount of money, and people who have a large amount of money don't buy EAs.
You get what u pay for and there is no free lunch.You pay peanuts u get monkeys.
So E A buyers are being offered crappy EAS and not being sold really good EAS.
The better EAS are used for running managed accounts and are not sold