Forex Advice – Forex Systems

We see a new automated forex trading system virtually every week now, it seems to me. All of them produce good results on paper but when it comes to live testing the results can be very different, as all of us know from bitter experience.

So why does the dream turn to ashes? Does the fault lie entirely with the user and the settings that they chose? Did the developer advertise fake results? Or is there some bizarre cosmic law that says that as soon as a forex system is automated, the whole market will turn around 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. I may be criticized for this but here is what I believe really happens …

This is how a forex robot usually comes into existence: traders take a system that has been working for them (or figure out a new one and backtest it), pay a programmer to automate it, and then to recoup the expense of the software development and more, they sell it to anyone willing to pay.

The critical question comes in the very first step. If a system has been working for the expert for a reasonable time, fine. But often times they move far too quickly. They are relying more or less on backtesting. They know that people will buy a new robot, so they can easily cover the money they put in to automation, so there is really practically no risk in taking on a programmer the minute they dream up a system that performs well on backtests. They do not wait for live test results.

So they go ahead and create a new forex currency trading system. Then of course they need to market it. 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 it might be better not to test it on the live market, but release it to the market right away. People are credulous and too many of them will buy on the backtest results by themselves. Quick! the developer thinks, Let’s get it on the market now while it still seems that it works!

So what’s the problem with backtesting? Nothing, if you think that its results in the future will mirror past results. But wait, isn’t that the first thing they tell you in the small print 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 in roulette are under 50%, right? It’s less because of the zero. I think it’s about 48.5%. But distribution patterns mean that if you took a couple of hundred spins you would probably not get exactly that many blacks. You might have 51% black for example.

So what if you did that, considered those results and said, Wow, 51% black in backtests! Cool, so now I can develop a robot that always bets on black …

It would lose.

Sure the currency trading market is a little more involved than a roulette wheel, but I think this is basically what developers do if they build a forex automated trading system based on backtests. And often, I think that is why they don’t work.

I am not saying that you shouldn’t use robots and expert advisors, not at all. A forex robot can be a wonderful tool.

I’m simply saying that we should all consider how they have been tested. Do not rush to buy the latest forex robot the minute it comes out. Wait a few weeks at least, check the forums and see how other people like you get along with new forex trading systems before you thrust your money into the developer’s hot little hands.