Someone releases a new
automated forex trading system practically every week now, it seems to me. They all produce profitable results in theory but when users start live testing the results can be very different, as all of us know from bitter experience.
So why does the dream turn to dust? Is it down to the user and the settings that they select? Did the developer advertise fake results? Or is there some bizarre cosmic law that says that the moment a forex system is automated, the currency market will turn around to prevent it from working?
I know that last one sounds crazy but but sometimes I have wondered and you too maybe.
But honestly I do not believe it’s any of those reasons. I may be hated for this but this is what I believe really happens …
This is how a new forex robot is usually developed: 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 recoup the cost of the software development and hopefully make a lot more besides, they sell it to other traders like you and me.
The critical question comes in the very first step. If the system has been working for the trader for a reasonable time, fine. But most times they move far too quickly. They depend to a greater or lesser extent on backtesting. They know that new robots sell, so they will surely cover their investment cost on the automation, so there is in fact practically no risk in giving it to a programmer as soon as they think up a system that gives the results on backtests. They do not wait for live test results.
So they go ahead and create a new automatic forex trading system. Then of course they need to market it. Possibly they might do a little live testing, but it is risky! It might make a loss. They won’t want to lie about the results so it might be better not to run it on the live market, but release it to the market immediately. People are credulous and far too many of them will buy on the backtest results by themselves. Quick! the developer thinks, Let’s get it out there now while it still looks like it works!
So what is the problem with backtesting? Nothing, if you think that its results in the future 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 …”
Consider a simple example. You know that the chances of black winning at roulette are less than 50%, right? The zero makes it less. 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 number of blacks. For example you might have 51% black.
So what if you did that, considered those results and said, Wow, 51% black in backtests! Excellent, now I can develop a robot that always bets on black …
On live tests, it would lose.
It is true that the foreign exchange market is more complicated than a roulette wheel, but I believe that’s fundamentally what developers are doing when they build a forex automatic trading system based on backtests. And I believe that is why they often do not work.
I’m not saying don’t use forex robots, not at all. An automated forex trading system can be a wonderful tool.
I’m only saying that we should all consider how the robots that we use have been tested. I would never buy the latest robot the minute it is launched. Wait a while, check the online forums and see how other people like you get along with new forex trading systems before you thrust your money into the developer’s grasping hands.
