Automatic Forex Trading Systems: Why Do They Fail?
Someone puts out a new automated forex trading system virtually every week now, it seems. They all give amazing results in theory but when we get into live testing the bottom line can be very different, as all of us know from bitter experience.
So why do the dreams turn to dust? Does the fault lie entirely with the user and the settings that they select? Were the results faked? Or is there some bizarre law of physics that says that as soon as a system is automated, the whole market will alter its course to stop it working?
I know that last one may sound a little crazy but but sometimes I have wondered and you too perhaps.
But in reality I do not believe it is due to any of those reasons. Maybe I will be hammered for this but here is what I believe really happens …
The way a forex robot tends to come into being is this: forex experts take a system that has been working for them (or invent a new one and backtest it), pay a software developer to automate it, and then to get back the cost of the software and hopefully make a lot more besides, they sell it to other traders like you and me.
The crunch comes in that first step. If a system has been working for the expert for a reasonable time, fine. But often times they act much too fast. They depend more or less on backtesting. They know that people will buy a new robot, so they are certain to cover the cost of the programming, so there is really practically no risk in them giving it to a programmer as soon as they think up a system that backtests pretty well. They do not wait for live test results.
So they go ahead and create a new forex currency trading system. Having done that, they need to sell it. They might possibly do a small amount of live testing, but that is risky! It might make a loss. They won’t want to 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 away. People believe what they read and far too many of them will buy on the basis of backtesting alone. Quick! the trader thinks, Let’s release it now while it still works!
So what’s the problem with backtesting? Nothing, if you accept that its results in the future will mirror its results in the past. But wait, isn’t that the first thing they tell you in the disclaimer on all investment documents? “Past results are not a guarantee of future performance …”
Take this 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’s about 48.5%. But distribution patterns mean that if you considered a few hundred spins you would probably not get exactly that number of blacks. You might easily see 51% black for example.
So imagine if you did that, looked at the results and said, Wow, 51% black in backtests! Cool, let’s develop a robot that always bets on black …
On live tests, it would lose.
Of course the currency trading market is a little more complex than a roulette wheel, but still I believe this is fundamentally what developers are doing if they build a forex automatic trading system based on backtests. And I think that is why they often do not work.
I do not mean that you should not use robots and expert advisors, not at all. A forex robot can be a wonderful tool.
I’m simply saying that we should all pay attention to how they have been tested. Don’t buy the latest forex robot the same day that it is launched. Wait a while, check the forums and find out how other people like you get along with new forex trading systems before you thrust your money into the developer’s eager hands.
Jason Cline writes articles on automated forex trading systems and the foreign exchange market for many internet sites. Discover his opinion of the top selling FAPTurbo in his FAPTurbo review at www.automatedeasyforexsystem.com
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