We see a new automated forex trading system almost every week now, it seems. They all show profitable results on paper but when users start live testing the bottom line 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? Did the promoters fake the results? Or is there some bizarre law that says that as soon as a system is automated, the forex market will alter its course so that it doesn’t work? I know that last one sounds crazy but I’ve wondered about it sometimes and maybe you have too!
But honestly I do not believe it’s due to any of those causes. Maybe I will be criticized for this but here’s what I believe actually happens …
This is how a forex robot usually comes into existence: a trader or traders take a system that has been bringing in profits (or figure out a new one and backtest it), pay a programmer to automate it, and then to recover the cost of the software development and more, they sell it to you and me.
The crunch comes in the very first step. If a system has been working for the expert for a good long time, fine. But many times they act much too quickly. They rely to a greater or lesser extent on backtesting. They know that new robots sell, so they can easily cover the cost of the automation, so there is really practically no risk in hiring a programmer as soon as they dream up something that gives the results on backtests. They do not necessarily wait for live testing.
So they create a new forex currency trading system. Having done that, 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 maybe it would be better not to run it live, but just release it to the market immediately. People believe what they read and too many of them will buy on the backtest results alone. Quick! the developer thinks, Let’s get it out there now while it still looks like it works!
So what’s wrong with backtests? Nothing, if you accept that its results in the future will be the same as past results. But hey, isn’t that the first thing you see 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 in roulette are just under 50%, don’t you? It’s less because of the zero. I think it’s about 48.5%. But distribution patterns mean that if you considered a couple of hundred spins you would probably not get exactly that many blacks. You might easily see 51% black for example.
So what if you did that, took those results and said, Wow, 51% black in backtests! Excellent, let’s develop a robot that always bets on black …
On live tests, it would lose.
Of course the foreign exchange market is a little more involved than a roulette wheel, but even so I believe that is fundamentally what developers are doing if they build a forex automatic trading system based on backtests. And I think that is why they often fail.
I do not mean don’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 systems that we use have been tested. Don’t grab the latest robot the moment it is launched. Wait a few weeks at least, check the online forums and see how real users like you get along with new automated forex trading systems before you push your money into the developer’s greedy hands.
Jason Cline writes articles on automated forex trading system programs and the fx market for many internet sites.
See his opinion of the top selling FAP Turbo in his FAP Turbo review
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