There are two options for the MetaTrader platform, but not all brokers are offering them both: MetaTrader 4 and MetaTrader 5. This is either a limitation from a regulatory point of view, or it is simply a decision the Forex broker must make. It should be mentioned here that the 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 the 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 should be made, chances are that the 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 almost 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 the trading platform to use.
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Limitations
MetaTrader 5 has some limitations, and these are not present on the MetaTrader 4 version. Such limitations are the inability to hedge in the same trading account and the FIFO (First in First out) rule that 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 the volume for the two positions is the same, while a partial hedge implies that the volume is different. For example, let’s assume a trader is long 1 lot EURUSD from 1.0665, and an economic news is released, and the market starts moving lower. It could be that the reason for going long on the pair was based on a bigger 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 cost of opportunity 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 possible only when using the MetaTrader 4 version. The MetaTrader 5 doesn’t allow hedging, and for a trader to go short as per the above scenario, the long position must be closed. Only after that is closed, a short trade can 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 bode well with Forex traders. Forex trading is a risky activity, everyone knows that. This makes Forex traders investors with a high-risk appetite by definition, so refusing them the option to hedge is not perceived as a positive thing. In some regions, regulators are forbidding hedging in the same trading account.
The United States is such a country and, 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, that 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 is buying EURUSD. 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 mostly making fake moves rather than trending. Therefore, entering a trade is subject to scaling. Scaling means deploying your margin in a trade at different levels. The idea behind it is to have a good average that is the result of different entries at different levels. If the analysis is made with a longer time horizon, applying this strategy on the MetaTrader 5 is a difficult thing. It may be that until the end of the week, the trader bought five positions on EURUSD at different levels. To avoid unnecessary risks by keeping all positions open over the weekend, the trader decides to close the ones in profit and keep only the ones that show a loss. This is not possible under 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 design 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 and yet losing money.
Risk Aversion
Forex traders are risk-taking persons by definition. Therefore, limiting their access to risky strategies is not something a broker wants to do unless it is being forced by regulators. If the regulatory body allows 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, the MetaTrader 5 has its benefits and advantages as well. It is being proved that, from a money management point of view, it is performing better than MetaTrader 5. 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 protecting the trading account from unnecessary risks. Having said that, we can draw the conclusion that the MetaTrader 4 platform is designed for traders that have a big risk appetite, while the MetaTrader 5 should be used by conservative traders. Both versions are loved by traders, resulting in the most popular trading platform of them all.
Recommended Further Readings
- Why Trading with a Regulated Forex Broker?
– What is regulation for a brokerage house, why it is important, things to look for, how to check if the broker is telling the truth, etc. - Benefits of Mobile Forex Trading
– Pros and Cons of mobile trading, highlighting the net benefits of it. - Explaining Commissions in Forex Trading
– What type of Forex trading accounts are subject to paying commissions, what does it means and is this a good or a bad thing? - Opening a Live Trading Account
– Steps to open a live trading account with a Forex broker, starting with the time taken for the whole process, documentation to be sent, verification process, trading platforms to download, etc. - What are “Lots” in Forex Trading
– Explaining the concept of a lot of Forex trading, and from that heading to micro-lots, different trading accounts, and broker’s limitations. - Volume and Slippage – Value of a Pip and Execution Types
– Execution is important to every Forex trading and this article deals with the difficulties to trade big volumes with little or n- slippage.
Other Educational Materials
- Expert Advisor Development on MT4/MT5 for Automated Algorithmic Trading on EURUSD M1 Data.” Chan, Lanz, and Wing-Keung Wong. ” (2013).
- “Automated Gold Trading with MT4.” Wong, Manyat, Lanz Chan, and Wing-Keung Wong. (2014).
