Automated Forex Trading Systems: Why Do They Fail?

January 30th, 2010 by Jason Cline

There is a new automated forex trading system practically every week now, it seems to me. They all show amazing 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 do the dreams crumble to dust? Is it the responsibility of the user and settings? Were the results faked? Or is there some little known cosmic law that dictates that as soon as a currency trading system is automated, the currency market will turn around to stop it working?

I know that last one sounds crazy but but sometimes I have wondered and perhaps you have too.

But really I do not believe it’s due to any of those reasons. Maybe I will be blasted for this but here is what I believe really happens …

This is how a forex robot usually comes into existence: a trader or 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 recover the cost of the software and more, they sell it to people like you and me.

The critical question comes in that first step. If a system has been working for the trader for a long time, no problem. But most times they move far too fast. They rely more or less on backtesting. They know that new robots always sell well, so they are sure to cover the cost of the programming, so there is in fact virtually no risk in them giving it to a programmer as soon as they dream up something that performs well on backtests. They do not necessarily wait for live testing.

So they go ahead and create a new automatic forex trading system. Then of course they must market it. Possibly they might do a little live testing, but it is risky! It might make a loss. They couldn’t lie about the results so maybe it would be better not to run it on the live market, but release it to the market right now. People are credulous and many of them will buy on the basis of backtesting alone. Quick! the expert thinks, Let’s release it now while it still works!

So what is the problem with backtesting? Nothing, if you accept that its results in the future will be the same as its results in the past. But hey, isn’t that the first thing they tell you in the fine print on all investment documents? “Past results are not a guarantee of future performance …”

Consider this simple example. You know that the odds of black winning in roulette are just under 50%, don’t you? The zero makes it less. I think it is around 48.5%. But statistically if you recorded a few hundred spins you would probably not get exactly 48.5% blacks. For example you might have 51% black.

So imagine if you did that, took those results and said, Wow, 51% black in backtests! Cool, now I will develop a robot that always bets on black …

It would lose money.

Sure the foreign exchange market is a little more involved than a roulette wheel, but I believe that’s fundamentally what developers are doing if they build a forex automated system based on backtests. And I think that is why they often fail.

I do not mean that you should not use forex robots, not at all. An automated forex trading system can be a wonderful tool.

I’m only saying please look carefully at how the robots that we use have been tested. I would never grab the latest forex robot the minute it is launched. Wait a few weeks at least, check the forums and find out how real users like you get along with new forex trading systems before you push your money into the developer’s greedy hands.

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

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