Automatic Forex Trading Systems: Why Do They Lose Money?
By Jason Cline
You will see a new automated forex trading system practically every week now, it seems to me. Automatic forex trading systems all show great results in theory but when it comes to 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 due to the user and settings? Did the developer advertise fake results? Or is there some obscure law that says that the moment a forex trading system is automated, the currency market will turn around so that it doesn’t work?
I know that last one sounds crazy but but sometimes I have wondered and you too perhaps.
But in reality I do not think it’s any of those causes. I may be blasted for this but this is what I think actually happens …
This is how a new forex robot is usually developed: forex experts take a system that has been bringing in profits (or dream up a new one and backtest it), pay a software developer to automate it, and then to cover the cost of the programming and more, they market it to people like you and me.
The crunch comes in that first step. If a system has been working for the trader for a reasonable time, no problem. But many times they act much too quickly. They are depending to a greater or lesser extent on backtesting. They know that new robots always sell well, so they can easily cover the money they put in to automation, so there is in fact no risk in hiring a programmer the minute they dream 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 to sell it. They might possibly do a small amount of live testing, but it would be risky! It might make a loss. They wouldn’t lie about the results so maybe it would be better not to test it live, but release it to the market immediately. People are credulous and too many of them will buy on the basis of backtesting by themselves. Quick! the trader thinks, Let’s release it now while it still works!
So what’s wrong with backtests? Nothing, if you think that future results will be the same as its results in the past. But wait, isn’t that the first thing you see in the disclaimer on all investment documents? “Past results are not a guarantee of future performance …”
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Look at this simple example. You know that the chances of black winning 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 took a few hundred spins you would probably not get exactly 48.5% blacks. You might have 51% black for example.
So imagine if you did that, looked at the results and said, Wow, 51% black in backtests! Excellent, let’s develop a robot that always bets on black …
It would lose.
Sure the forex market is more involved than a roulette wheel, but still I believe this is basically what developers are doing when they build a forex robot based on backtests. And often, I think that is why they don’t work.
I’m not saying that you shouldn’t use forex software, not at all. A forex robot can be a wonderful tool.
I am just saying that we should all pay attention to how the robots that we use have been tested. I would not buy the latest robot the moment it comes out. Wait a while, check the online forums and see how real users like you get along with new automatic forex trading systems before you push your money into the developer’s eager hands.
Jason Cline writes articles about automatic forex trading systems and the forex market for a variety of web sites.
Discover his evaluation of the best selling FAPTurbo in his FAP Turbo review.
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