Forex Currency Trading Systems: Why Do They Lose Money?
- Posted by admin on February 27th, 2009 filed in Finance
People put out new automated forex trading systems practically every week now, it seems to me. All of them produce profitable results on the website but when we try live testing the bottom line can be very different, as all of us know from bitter experience.
So why do the dreams crumble to ashes? Is it due to the user and the settings that they chose? Were the results faked? Or is there some bizarre cosmic law that says that as soon as a trading system is automated, the market will turn around so that it doesn’t work?
Sounds crazy I know but I’ve wondered about it sometimes and maybe you have too!
But really I do not believe it is any of those causes. I may be hammered for this but this is what I believe actually happens …
This is how a new forex robot is usually developed: a trader or traders take a system that has been bringing in profits (or devise a new one and backtest it), pay a software developer to automate it, and then to get back the cost of the software development and hopefully make a lot more besides, they market it to people like you and me.
The critical question comes in that first step. If the system has been working for the expert for a good long time, great. But usually they act much too fast. They are relying to a greater or lesser extent on backtests. They know that new robots always sell well, so they can easily cover the cost of the automation, so there is really virtually no risk in them hiring a programmer as soon as they dream up a system that performs well on backtests. They may not wait for live testing.
So they go ahead and create a new automated forex trading system. Having done that, they need to market it. They might do a little live testing, but that’s risky! It might make a loss. They couldn’t lie about the results so it might be better not to run it live, but just release it to the market right now. People tend to believe what they read and far too many of them will buy on the basis of backtesting alone. Quick! the expert thinks, Let’s release it now while it still looks like it works!
So what’s wrong with backtests? Nothing, if you believe that future results 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 …”
Look at this simple example. You know that the odds of winning on black at roulette are just under 50%, right? It’s less because of the zero. I think it is around 48.5%. But probability theory says that if you recorded a few hundred spins you would probably not get exactly that number of blacks. For example you might have 51% black.
So imagine if you did that, looked at the 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 even so I think that’s basically 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 am not saying that you shouldn’t use robots, not at all. An automatic forex trading system like FAP Turbo can be a wonderful tool.
I am simply suggesting that you should look carefully at how they have been tested. Don’t buy the latest forex robot the moment it is launched. Wait a couple of months, check the online forums and find out how other users like you get along with new automatic forex trading systems before you push your money into the developer’s greedy hands.
Jason Cline writes on automatic forex trading systems robots and the foreign exchange market for a variety of websites.
Find out his opinion of the top selling FAP Turbo in his FAP Turbo review.
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