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Forex Currency Trading Systems: Why Don’t They Work?
By plrprousers | February 27, 2009
Someone releases a new automated forex trading system almost every week now, it seems to me. They all give amazing results in the tests they show but when we get into live testing the results can be very different, as all of us know from bitter experience.
So why do the dreams crumble to ashes? Does the fault lie entirely with the user and the settings that they chose? Did the promoters fake the results? Or is there some bizarre law of physics that says that as soon as a currency trading system is automated, the currency market will alter its course to stop it working? I know that last one may sound a little crazy but but sometimes I have wondered and you too perhaps.
But in reality I don’t think it is due to any of those reasons. Maybe I will be hated for this but here is what I believe actually happens …
This is how a new forex robot is usually developed: forex experts take a system that has been working for them (or dream up a new one and backtest it), pay a programmer to turn it into a robot, and then to cover the cost of the software development and more besides, they sell it to other traders like you and me.
The critical question comes in the very first step. If a system has been working for the developer for a reasonable time, great. But many times they act much too fast. They are depending to a greater or lesser extent on backtests. They know that new robots sell, so they can easily cover the money they put in to automation, so there is in fact no risk in them hiring a programmer as soon as they think up something that backtests pretty well. They may not wait for live testing.
So they create a new automated forex trading system. Having done that, they need people to buy it. They might do a small amount of live testing, but it would be risky! What if it made a loss? They won’t want to lie about the results so it might be better not to run it live, but release it immediately. People tend to believe what they read and too many of them will buy on the backtest results by themselves. Quick! the trader thinks, Let’s get it on the market now while it still seems that it works!
So what is the problem with backtesting? 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 you see in the fine print on all investment documents? “Past results are not an indicator of future performance …”
Take a simple example. You know that the chances of winning on black at roulette are less than 50%, right? The zero makes it less. I think it is about 48.5%. But statistically if you took a couple of hundred spins you would probably not get exactly that number of blacks. You might have 51% black for example.
So imagine if you did that, took those results and said, Wow, 51% black in backtests! Excellent, now I will develop a robot that always bets on black …
It would lose.
Of course the forex market is more complicated than a roulette wheel, but I think this is basically what developers are doing when they build a forex automated trading system based on backtests. And I believe that is often why they fail.
I do not mean that you should not use robots, not at all. An automatic forex trading system can be a wonderful tool. I am just asking you to look carefully at how the systems that we use have been tested. I would not buy the latest forex robot the same day that it comes out. Wait a few weeks at least, check the online forums and see how other 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 features on automated forex trading system robots and the fx trading market for a variety of websites.
See his opinion of the top selling FAP Turbo in his FAP Turbo review
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