Automatic Forex Trading Systems: Why Do They Fail?
We see a new automated forex trading system almost every week now, it seems to me. They all produce profitable results in the tests they show but when we try live testing the results can be very different, as all of us know from bitter experience.
So why does the dream crumble to ashes? Is it down to the user and the settings that they choose? Were the results faked? Or is there some little known law that dictates that the moment a forex trading system is automated, the market will alter its course so that it doesn’t work?
I know that last one sounds crazy but but sometimes I have wondered and perhaps you have too.
But honestly I do not believe it is any of those causes. I may be hated for this but here is what I believe really happens …
This is how a new forex robot is usually developed: a trader or traders take a system that has been working for them (or think up a new one and backtest it), pay a programmer to turn it into a robot, and then to get back the expense of the programming and more, they sell it to anyone willing to pay.
The crunch comes in the very first step. If a system has been working for the expert for a good long time, great. But often times they act much too fast. They rely to a greater or lesser extent on backtesting. They know that people will buy a new robot, so they are sure to cover the cost of the automation, so there is really no risk in them taking on a programmer the minute they dream up a system that backtests pretty well. They do not necessarily wait for live test results.
So they go ahead and create a new forex currency trading system. Having done that, they need to market it. Possibly they might do a little live testing, but it’s risky! What if it made a loss? They wouldn’t lie about the results so maybe it would be better not to test it on the live market, but just release it immediately. People tend to believe what they read and too many of them will buy on the basis of backtesting by themselves. Quick! the developer thinks, Let’s release it now while it still works!
So what’s wrong with backtesting? Nothing, if you believe that its results in the future will be the same as its results in the past. But wait, isn’t that the first thing they tell you in the small print on all investment documents? “Past results are not a guarantee of future performance …”
Take a simple example. You know that the odds of winning on black in roulette are under 50%, don’t you? It’s less because of the zero. I think it is around 48.5%. But distribution patterns mean that if you considered a couple of hundred spins you would probably not get exactly that number of blacks. For example you might have 51% black.
So imagine if you did that, took those results and said, Wow, 51% black in backtests! Excellent, now I will develop a robot that always bets on black …
It would lose money.
Of course the forex market is more complicated than a roulette wheel, but even so I believe that’s basically what developers do 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 forex software, not at all. An automated forex trading system can be a wonderful tool.
I’m just saying please look carefully at how the systems that we use have been tested. I would not buy the latest robot the minute it is launched. Wait a while, check the online forums and see how real people like you get along with new forex trading systems before you thrust your money into the developer’s eager hands.
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More information on FAP Turbo:
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