Automated Forex Trading Systems: What Is Wrong With Them?
We see a new automated forex trading system just about every week now, it seems to me. They all produce great results in the tests they show but when it comes to live testing the bottom line can be very different, as most of us know from bitter experience.
So why does the dream crumble to ashes? Is it the responsibility of the user and their settings? Were the results faked? Or is there some obscure universal law that dictates that as soon as a system is automated, the forex market will alter its course to stop it working? Sounds crazy I know but I’ve wondered about it sometimes and perhaps you have too.
But really I don’t think it’s any of those reasons. I may be blasted for this but here is what I believe really happens …
This is how a new forex robot is usually developed: a trader or traders take a system that has been bringing in profits (or figure out a new one and backtest it), pay a software developer to turn it into a robot, and then to recover the expense of the programming and more besides, they sell it to people like you and me.
The crunch comes in that first step. If a system has been working for the trader for a reasonable time, no problem. But usually they act much too quickly. They are depending to a greater or lesser extent on backtests. They know that new robots sell, so they will easily cover their investment cost on the automation, so there is in fact no risk in taking on a programmer the minute they think up something that performs well on backtests. They do not wait for live testing.
So they go ahead and create a new automatic forex trading system. Then of course they need to market it. They might do a little live testing, but it would be risky! It might make a loss. They couldn’t lie about the results so it might be better not to test it on the live market, but just release it to the market immediately. People tend to believe what they read and too many of them will buy on the basis of backtesting alone. Quick! the developer thinks, Let’s get it out there now while it still works!
So what’s wrong with backtests? Nothing, if you accept that its results in the future will mirror its results in the past. But hey, isn’t that the first thing you see in the small print on all investment documents? “Past results are not an indicator of future performance …”
Look at a simple example. You know that the odds of black winning at roulette are under 50%, right? It’s less because of the zero. I think it is around 48.5%. But probability theory says that if you took a couple of hundred spins you would probably not get exactly that number of blacks. For example you might have 51% black.
So imagine if you did that, took those results and said, Wow, 51% black in backtests! Excellent, so now I can develop a robot that always bets on black …
It would be sure to lose in the long term.
Of course the currency trading market is more complex than a roulette wheel, but still I believe this is basically what developers do when they build a forex automated robot based on backtests. And I think that is why they often fail.
I am not saying don’t use robots, not at all. An automated forex trading system can be a wonderful tool. I’m simply asking you to pay attention to how they have been tested. Don’t buy the latest robot the minute it comes out. Wait a few weeks at least, watch the online forums and see how other users like you get along with new automatic forex trading systems before you push your money into the developer’s eager hands.
Jason Cline writes features about automated forex trading system programs and the fx trading market for a variety of internet sites.
Find out his evaluation of the best selling FAP Turbo in his FAP Turbo review
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