We see a new automated forex trading system almost every week now, it seems. All of them give profitable results in theory but when we try live testing the story can be very different, as many of us know from bitter experience.
So why does the dream crumble to ashes? Is it due to the user and settings? Did the promoters fake the results? Or is there some little known universal law that says that as soon as a system is automated, the whole 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 do not believe it is because of any of those causes. Maybe I will be hammered for this but here’s what I think actually happens …
This is how a new forex robot is usually developed: forex experts take a system that has been working for them (or devise a new one and backtest it), pay a programmer to automate it, and then to recoup the expense of the programming and make something on it too, they market it to you and me.
The crunch comes in that first step. If the system has been working for the developer for a good long time, fine. But often times they act far too quickly. They are depending to a greater or lesser extent on backtesting. They know that people will buy a new robot, so they can easily cover the money they put in to automation, so there is in fact no risk in giving it to a programmer the minute they think up a system that backtests pretty well. They do not necessarily wait for live testing.
So they go ahead and create a new automated forex trading system. Then of course they need people to buy it. Possibly they might do a little live testing, but that is risky! What if it made a loss? They won’t want to lie about the results so it might be better not to run it live, but just release it immediately. People tend to believe what they read and too many of them will buy on the backtest results by themselves. Quick! the expert thinks, Let’s get it on the market now while it still seems that it works!
So what’s wrong with backtests? Nothing, if you believe that future results will mirror past results. But hey, isn’t that the first thing they tell you in the disclaimer on all investment documents? “Past results are not an indicator of future performance …”
Take this simple example. You know that the odds of winning on black at roulette are under 50%, right? It’s less because of the zero. I think it’s around 48.5%. But statistically if you took a couple of hundred spins you would probably not get exactly that many blacks. You might have 51% black for example.
So imagine if you did that, considered those results and said, Wow, 51% black in backtests! Great, let’s develop a robot that always bets on black …
On live tests, it would lose.
It is true that the currency trading market is a little more involved than a roulette wheel, but I believe that’s fundamentally what developers do if they build a currency trading robot based on backtests. And I believe that is often why they fail.
I’m 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 consider how they have been tested. Don’t grab the latest robot the moment it comes out. Wait a couple of months, check the online forums and find out how real users like you get along with new automated forex trading systems before you thrust your money into the developer’s greedy hands.
Jason Cline writes articles about automated forex trading system programs and the forex exchange trading market for several websites.
Discover what he thinks of the top selling FAPTurbo in his FAP Turbo review
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