Automatic Forex Trading Systems: Why Do They Fail?

By Jason Cline

You will see a new automated forex trading system practically every week now, it seems. They all show profitable results in theory but when it comes to live testing the story can be very different, as all of us know from bitter experience.

So why does the dream crumble to dust? Is it the fault of the user and settings? Did the promoters fake the results? Or is there some bizarre law of physics that dictates that the moment a forex system is automated, the whole market will turn around to stop it working?

I know that last one may sound a little crazy but but sometimes I have wondered and you too maybe.

But honestly I don't believe it's any of those causes. Maybe I will be criticized for this but this is what I think actually happens ...

This is how a new forex robot is usually developed: traders take a system that has been bringing in profits (or think up a new one and backtest it), pay a software developer to turn it into a robot, and then to recover the expense of the software and hopefully make a lot more besides, they market it to you and me.

The critical question comes in that first step. If the system has been working for the developer for a long time, no problem. But in most cases they act much too fast. They depend to a greater or lesser extent on backtests. They know that new robots sell, so they are certain to cover the money they put in to automation, so there is in fact practically no risk in them taking on a programmer as soon as they think up a system that performs well on backtests. They do not wait for live testing.

So they go ahead and create a new automatic forex trading system. Then of course they must market it. They might do a small amount of live testing, but that's risky! What if it made a loss? They wouldn't lie about the results so maybe it would be better not to test it live, but release it right away. People are credulous and too many of them will buy on the basis of backtesting by themselves. Quick! the expert thinks, Let's get it out there now while it still seems that it works!

So what's wrong with backtests? Nothing, if you accept that its results in the future will be the same as past results. But hey, isn't that the first thing you see in the disclaimer on all investment documents? "Past results are not an indicator of future performance ..."

Take a simple example. You know that the chances of black winning in roulette are less than 50%, don't you? It's less because of the zero. I think it's around 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 ...

On live tests, it would lose.

It is true that the forex market is more involved than a roulette wheel, but still I believe this is basically what developers do when they build a forex automated robot based on backtests. And often, I think that is why they don't work.

I do not mean that you shouldn't use robots, not at all. An automatic forex trading system can be a wonderful tool.

I'm simply asking you to pay attention to how the systems that we use have been tested. Do not rush to grab the latest forex robot the same day that it is launched. Wait a while, watch the online forums and find out how real people like you get along with new forex trading systems before you thrust your money into the developer's eager hands. - 23229

About the Author:

Jason Cline writes on automatic forex trading systems and the foreign exchange market for many internet sites. Discover his opinion of the top selling FAP Turbo in his FAP Turbo review at www.automatedeasyforexsystem.com