You will see a new automated forex trading system virtually every week now, it seems to me. They all produce amazing results on the website but when users start live testing the story can be very different, as many of us know from bitter experience.
So why do our hopes turn to dust? Does the fault lie entirely with the user and the settings that they choose? Did the promoters fake the results? Or is there some little known universal law that says that as soon as a forex system is automated, the market will alter its course to prevent it from working? I know that last one may sound a little crazy but I’ve wondered about it sometimes and you too maybe.
But honestly I don’t think it is because of any of those causes. Maybe I will be hated for this but here is what I believe actually happens …
This is how a Forex robot usually comes into existence: Forex experts take a system that has been working for them (or figure out a new one and back test it), pay a software developer to automate it, and then to recover the expense of the programming and make something on it too, they market it to people like you and me.
The critical question comes in the very first step. If the system has been working for the trader for a long time, fine. But often times they move too quickly. They rely to a greater or lesser extent on backtesting. They know that there is always a market for new robots, so they will surely cover the cost of the automation, so there is in fact no risk in them hiring a programmer as soon as they think up something that performs well on back tests. They do not wait for live testing.
So they create a new automated Forex trading system. Having done that, they need people to buy it. Possibly they might do a small amount of live testing, but it’s risky! It might make a loss. They won’t want to lie about the results so it might be better not to test it live, but just release it to the market right now. People tend to believe what they read and many of them will buy on the back test results alone. Quick! the expert thinks, Let’s get it on the market now while it still works!
So what’s the problem with back tests? 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 fine print on all investment documents? “Past results are not a guarantee of future performance …”
Look at this simple example. You know that the chances of winning on black at roulette are less than 50%, right? It’s less because of the zero. I think it’s about 48.5%. But probability theory says that if you took a few hundred spins you would probably not get exactly that many blacks. You might have 51% black for example.
So imagine if you did that, took those results and said, Wow, 51% black in back tests! Great, now I will develop a robot that always bets on black …
On live tests, it would lose.
Sure the foreign exchange market is more involved than a roulette wheel, but I think that’s basically what developers do if they build a Forex automatic trading system based on past results. And I believe that is often why they fail.
I am not saying that you shouldn’t use Forex software, not at all. An automated Forex trading system can be a very profitable tool. I’m only asking you to look carefully at how the robots that we use have been tested. I would never buy the latest robot the moment it comes out. Wait a couple of months, check the online forums and see how real traders like you get along with new automated Forex trading systems before you thrust your money into the developer’s grasping hands.
Jason Cline writes about automated forex trading system programs and the currency trading market for several web sites.
Discover his opinion of the top selling FAPTurbo in his FAP Turbo review.
