MetaTrader 4 vs MetaTrader 5

There are two options for the MetaTrader platform, but not all brokers offer both of them: MetaTrader 4 and MetaTrader 5. This is either a limitation from a regulatory point of view, or simply a decision the Forex broker must make. It should be mentioned here that MetaTrader 5 is the unlikely choice for Forex traders unless they have no other option to choose from. If both versions are offered, then the likelihood is that MetaTrader 4 will be chosen. The reason for this comes from the fact that this version has virtually no limitations, so traders can use it to its full potential. On the other hand, MetaTrader 5 has some specific rules to be followed, and not all trading strategies can be applied on such a trading platform. Nevertheless, in both cases, there are factors that attract traders; but it should be mentioned from the start that if a comparison between the two is to be made, chances are that MetaTrader 4 is going to win the competition. However, this depends greatly on the type of investor a trader is.

Comparing the Two Trading Platforms

To compare two products that are so similar, one should only look at the differences between the two, if any, and how they influence trading. In this case, there are a few things that are different, and traders need to know in advance about them before choosing which trading platform to use.

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Limitations

mt4 vs mt5MetaTrader 5 has some limitations that are not present on the MetaTrader 4 version. Such limitations are the inability to hedge on the same trading account, and the First In First Out (FIFO) rule which must be respected. To hedge a position in a trading account means to open two trades on the same currency pair in opposite directions. A full hedge means that the volume for the two positions is the same, while a partial hedge implies that the volume is different. For example, let’s assume that a trader is long 1 lot EUR/USD from 1.0665; an economic news item is released, and the market starts moving lower. It could be that the reason for going long on the pair was based on a longer timeframe analysis, so it is possible that the move lower will just be a correction on that timeframe. Depending on the timeframe, such a correction can take quite some time, from days to weeks, and in this period the opportunity cost of not being short is high. However, if the trading account allows going short on the same pair, a new trade can be taken. This is called hedging, and it is only possible  when using the MetaTrader 4 version. MetaTrader 5 doesn’t allow hedging, and for a trader to go short as per the above scenario, the long position must be closed, as only after it is closed can a short trade be taken.

This limitation is made in the interest of the Forex trader, as it fits better in the overall money management system to be followed. In plain English, hedging is perceived as a risky trading strategy, and avoiding it is positive on the long run. While this is true to some extent, the idea of a limitation doesn’t sit well with Forex traders. Forex trading is a risky activity; everyone knows that. This makes Forex traders by definition investors with a high-risk appetite; so refusing them the option to hedge is not perceived as a positive thing. In some regions, regulators forbid hedging in the same trading account. The United States is such a country, and so to still offer the MetaTrader platform to traders already in love with it, brokers are leaning towards the MetaTrader 5 version.

Another limitation is the FIFO rule. According to this rule, which must be respected if the broker is based in the United States, trades on the same currency pair must be closed in the order of their opening. For example, let’s assume that at the start of a trading week, a trader buys EUR/USD. This is the result of both technical and fundamental analysis made over the weekend, and when the trading week starts, the plan goes into practice. However, trading is not straightforward, in the sense that markets are usually making fake moves rather than trending, and entering a trade is therefore subject to scaling. Scaling means deploying your margin in a trade at different levels. The idea behind it is to have a good average which is the result of different entries at different levels. If the analysis is made with a longer time horizon, applying this strategy on MetaTrader 5 is a difficult thing. It may be that by the end of the week, the trader bought five positions on EUR/USD at different levels. To avoid unnecessary risks by keeping all positions open over the weekend, the trader decided to close the ones in profit and only keep the ones that showed a loss. This is not possible under either the MetaTrader 5 rules or the FIFO rule. The only way to close trades on the same currency pair is to do that in the order of their opening: The first one must be closed before anything else. Again, while this is a thing designed to protect the average Joe trader, it is frustrating from a psychological point of view. Let’s not forget that trading the markets is mostly a psychological thing, as there are plenty of examples of traders being right on the direction the market is moving in, and yet losing money.

Risk Aversion

Forex traders are risk-taking persons by definition, and therefore limiting their access to risky strategies is not something a broker wants to do unless it is forced by regulators. If the regulatory body allows the MetaTrader 4 trading platform to be offered to clients, together with all its features, then make no mistake that almost all traders will choose it. From this point of view, there is simply no competition between the two MetaTrader versions. However, MetaTrader 5 has its benefits and advantages as well. It has been proved that, from a money management point of view, it is performing better than MetaTrader 4. If traders are forced to respect the FIFO rule and hedging is not allowed, the results are better on average. It may be that the feeling is that the trading platform is limiting the possibilities, but it is actually protecting the trading account from unnecessary risks.

Taking all of the above into account, we can draw the conclusion that the MetaTrader 4 platform is designed for traders who have a big risk appetite, while MetaTrader 5 should be used by conservative traders. Both versions are loved by traders, resulting in it being the most popular trading platform of them all.

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