We see a new automated forex trading system almost every week now, it seems. All of them give profitable results in theory but when it comes to live testing the story can be very different, as all of us know from bitter experience.
So why do the hopes turn to ashes? Is it the responsibility of the user and the settings that they select? Did the developer advertise fake results? Or is there some bizarre cosmic law that dictates that the moment a forex system is automated, the forex market will alter its course to stop it working?
Sounds crazy I know but but sometimes I have wondered and you too maybe.
But really I do not believe it's due to any of those causes. I may be hated for this but here's what I believe 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 devise a new one and backtest it), pay a programmer to turn it into a robot, and then to cover the expense of the software development and make something on it too, they sell it to you and me.
The critical question comes in the very first step. If a system has been working for the trader for a reasonable time, fine. But in most cases they move too fast. They are relying to a greater or lesser extent on backtests. They know that new robots sell, so they can easily cover the cost of the programming, so there is in fact no risk in taking on a programmer the minute they dream up a system that backtests pretty well. They do not wait for live testing.
So they go ahead and 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 it is risky! What if it made a loss? They won't want to lie about the results so maybe it would be better not to test it on the live market, but just release it immediately. People are credulous and many of them will buy on the basis of backtesting alone. Quick! the trader thinks, Let's release it now while it still looks like it works!
So what's wrong with backtests? Nothing, if you accept that future results will be the same as past results. But wait, isn't that the first thing you see in the disclaimer on all investment documents? "Past results are not a guarantee of future performance ..."
Look at a simple example. You know that the odds of winning on black at roulette are less than 50%, right? The zero makes it less. I think it is around 48.5%. But probability theory says that if you considered a couple of hundred spins you would probably not get exactly that number of 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! Cool, now I can develop a robot that always bets on black ...
It would lose money.
Of course the currency trading market is a little more complex than a roulette wheel, but I think that's fundamentally what developers do when they build a forex automated trading system based on past results. And I think that is why they often fail.
I am not saying that you shouldn't use robots and expert advisors, not at all. A forex robot can be a wonderful tool.
I am simply saying please look carefully at how the robots that we use have been tested. Do not rush to buy the latest robot the moment it is launched. Wait a while, check the online forums and see how real users like you get along with new forex trading systems before you push your money into the developer's eager hands.
So why do the hopes turn to ashes? Is it the responsibility of the user and the settings that they select? Did the developer advertise fake results? Or is there some bizarre cosmic law that dictates that the moment a forex system is automated, the forex market will alter its course to stop it working?
Sounds crazy I know but but sometimes I have wondered and you too maybe.
But really I do not believe it's due to any of those causes. I may be hated for this but here's what I believe 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 devise a new one and backtest it), pay a programmer to turn it into a robot, and then to cover the expense of the software development and make something on it too, they sell it to you and me.
The critical question comes in the very first step. If a system has been working for the trader for a reasonable time, fine. But in most cases they move too fast. They are relying to a greater or lesser extent on backtests. They know that new robots sell, so they can easily cover the cost of the programming, so there is in fact no risk in taking on a programmer the minute they dream up a system that backtests pretty well. They do not wait for live testing.
So they go ahead and 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 it is risky! What if it made a loss? They won't want to lie about the results so maybe it would be better not to test it on the live market, but just release it immediately. People are credulous and many of them will buy on the basis of backtesting alone. Quick! the trader thinks, Let's release it now while it still looks like it works!
So what's wrong with backtests? Nothing, if you accept that future results will be the same as past results. But wait, isn't that the first thing you see in the disclaimer on all investment documents? "Past results are not a guarantee of future performance ..."
Look at a simple example. You know that the odds of winning on black at roulette are less than 50%, right? The zero makes it less. I think it is around 48.5%. But probability theory says that if you considered a couple of hundred spins you would probably not get exactly that number of 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! Cool, now I can develop a robot that always bets on black ...
It would lose money.
Of course the currency trading market is a little more complex than a roulette wheel, but I think that's fundamentally what developers do when they build a forex automated trading system based on past results. And I think that is why they often fail.
I am not saying that you shouldn't use robots and expert advisors, not at all. A forex robot can be a wonderful tool.
I am simply saying please look carefully at how the robots that we use have been tested. Do not rush to buy the latest robot the moment it is launched. Wait a while, check the online forums and see how real users like you get along with new forex trading systems before you push your money into the developer's eager hands.
About the Author:
Jason Cline writes articles on automatic forex trading systems and the foreign exchange market for many web sites. Discover his opinion of the best selling FAPTurbo in his FAPTurbo review.
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