Someone releases a new automated forex trading system virtually every week now, it seems to me. They all produce profitable results in the tests they show but when we get into live testing the bottom line can be very different, as many of us know from bitter experience.
So why do the dreams turn to dust? Is it the responsibility of the user and the settings that they chose? Did the promoters fake the results? Or is there some bizarre cosmic law that dictates that the moment a currency trading system is automated, the market will alter its course to stop it working? I know that last one sounds crazy but but sometimes I have wondered and you too maybe.
But in reality I do not believe it’s because of any of those causes. I may be hammered for this but here is what I believe really happens …
The way a forex robot tends to come into being is this: a trader or traders take a system that has been bringing in profits (or dream up a new one and backtest it), pay a software developer to turn it into a robot, and then to recoup the expense of the programming and hopefully make a lot more besides, they market it to you and me.
The crunch comes in that first step. If a system has been working for the expert for a good long time, no problem. But often they move much too fast. They rely to a greater or lesser extent on backtests. They know that new robots sell, so they can easily cover their investment cost on the automation, so there is in fact practically no risk in giving it to a programmer the minute they think up something that backtests pretty well. They may not wait for live test results.
So they create a new automatic forex trading system. Then of course they want to be sure it will sell. They might do a little live testing, but that is risky! What if it made a loss? They wouldn’t lie about the results so it might be better not to run it on the live market, but just release it to the market right now. People are credulous and many of them will buy on the backtest results alone. Quick! the expert thinks, Let’s get it out there now while it still seems that it works!
So what is wrong with backtesting? Nothing, if you believe that future results will mirror its results in the past. But wait, 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 …”
Take this simple example. You know that the odds of black winning at roulette are just under 50%, right? It’s less because of the zero. I think it’s about 48.5%. But probability theory says that if you recorded a couple of hundred spins you would probably not get exactly 48.5% blacks. You might have 51% black for example.
So imagine if you did that, looked at the results and said, Wow, 51% black in backtests! Great, now I will develop a robot that always bets on black …
It would lose.
It is true that the forex market is a little more complicated than a roulette wheel, but even so I believe that’s basically what developers are doing when they build a forex automated trading system based on past results. And I believe that is often why they fail.
I do not mean that you should not use robots, not at all. An automatic forex trading system can be a very profitable tool. I’m just asking you to pay attention to how they have been tested. I would not buy the latest robot the minute it comes out. Wait a few weeks at least, check the forums and see how real people like you get along with new automatic forex trading systems before you push your money into the developer’s grasping hands.
Jason Cline writes features on automated forex trading system programs and the fx trading market for several web sites.
Discover his evaluation of the best selling FAPTurbo in his FAP Turbo review
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