Someone launches a new automated forex trading system just about every week now, it seems to me. They all show profitable results on paper but when we get into live testing the story can be very different, as most of us know from bitter experience.
So why do the dreams crumble to ashes? Is it down to the user and settings? Were the results faked? Or is there some obscure law of physics that says that as soon as a forex trading system is automated, the currency market will turn around to stop it working?
I know that last one may sound a little crazy but I've wondered about it sometimes and maybe you have too!
But really I do not think it is because of any of those reasons. Maybe I will be hated for this but here is what I think actually happens ...
The way a forex robot tends to come into being is this: traders take a system that has been bringing in profits (or invent a new one and backtest it), pay a programmer to turn it into a robot, and then to cover the cost of the software development and more, they sell it to other traders like you and me.
The critical question comes in the very first step. If a system has been working for the expert for a reasonable time, fine. But in many cases they move much too quickly. They are depending to a greater or lesser extent on backtesting. They know that there is always a market for new robots, so they are sure to cover their investment cost on the automation, so there is in fact no risk in taking on a programmer the minute they dream 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. Having done that, they need to market it. Possibly they might do a little live testing, but it is risky! It might make a loss. They wouldn't lie about the results so maybe it would be better not to test it on the live market, but 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 expert thinks, Let's get it on the market now while it still seems that it works!
So what's the problem with backtests? Nothing, if you think that future results will be the same as past results. But hey, isn't that the first thing you see in the small print on all investment documents? "Past results are not a guarantee of future performance ..."
Look at a simple example. You know that the odds of black winning at roulette are under 50%, don't you? The zero makes it less. I think it's around 48.5%. But statistically if you considered a couple of hundred spins you would probably not get exactly that many blacks. You might have 51% black for example.
So what 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 be sure to lose in the long term.
Of course the currency trading market is more complex than a roulette wheel, but still I think this is basically what developers do when they build a forex automated robot based on backtests. And often, I think that is why they don't work.
I do not mean that you should not use forex software, not at all. A forex robot can be a wonderful tool.
I'm just asking you to consider how the systems that we use have been tested. Do not rush to grab the latest forex robot the same day that it comes out. Wait a couple of months, watch the online forums and see how other users like you get along with new forex trading systems before you thrust your money into the developer's greedy hands.
So why do the dreams crumble to ashes? Is it down to the user and settings? Were the results faked? Or is there some obscure law of physics that says that as soon as a forex trading system is automated, the currency market will turn around to stop it working?
I know that last one may sound a little crazy but I've wondered about it sometimes and maybe you have too!
But really I do not think it is because of any of those reasons. Maybe I will be hated for this but here is what I think actually happens ...
The way a forex robot tends to come into being is this: traders take a system that has been bringing in profits (or invent a new one and backtest it), pay a programmer to turn it into a robot, and then to cover the cost of the software development and more, they sell it to other traders like you and me.
The critical question comes in the very first step. If a system has been working for the expert for a reasonable time, fine. But in many cases they move much too quickly. They are depending to a greater or lesser extent on backtesting. They know that there is always a market for new robots, so they are sure to cover their investment cost on the automation, so there is in fact no risk in taking on a programmer the minute they dream 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. Having done that, they need to market it. Possibly they might do a little live testing, but it is risky! It might make a loss. They wouldn't lie about the results so maybe it would be better not to test it on the live market, but 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 expert thinks, Let's get it on the market now while it still seems that it works!
So what's the problem with backtests? Nothing, if you think that future results will be the same as past results. But hey, isn't that the first thing you see in the small print on all investment documents? "Past results are not a guarantee of future performance ..."
Look at a simple example. You know that the odds of black winning at roulette are under 50%, don't you? The zero makes it less. I think it's around 48.5%. But statistically if you considered a couple of hundred spins you would probably not get exactly that many blacks. You might have 51% black for example.
So what 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 be sure to lose in the long term.
Of course the currency trading market is more complex than a roulette wheel, but still I think this is basically what developers do when they build a forex automated robot based on backtests. And often, I think that is why they don't work.
I do not mean that you should not use forex software, not at all. A forex robot can be a wonderful tool.
I'm just asking you to consider how the systems that we use have been tested. Do not rush to grab the latest forex robot the same day that it comes out. Wait a couple of months, watch the online forums and see how other users like you get along with new forex trading systems before you thrust your money into the developer's greedy hands.
About the Author:
Jason Cline writes on automated forex trading systems and the foreign exchange market for a number of internet sites. Discover his views on the top selling FAPTurbo in his FAPTurbo review.
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