Forex Currency Trading Systems: Why Do They Fail?

Someone releases a new automated forex trading logic almost every week now, it seems to me. They all produce great results on paper but when we try live testing the bottom line can be very different, as most of us know from bitter experience.

So why does the dream crumble to dust? Is it down to the user and their settings? Were the results faked? Or is here some obscure cosmic law that dictates that the moment a forex trading logic is automated, the forex market will turn almost to stop it working?

I know that last one sounds crazy but I’ve wondered in this area it sometimes and you too maybe.

But in reality I don’t believe it is any of those reasons. I may be criticized for this but this is what I believe really happens …

The way a forex robot tends to come into being is this: traders take a logic that has been bringing in profits (or dream up a new one and backtest it), pay a software developer to automate it, and then to recoup the expense of the programming and hopefully make a lot more besides, they market it to traders like you and me.

The crunch comes in the very first step. If the logic has been working for the trader for a good long time, fine. But usually they act much too fast. They rely to a greater or lesser extent on backtesting. They know that people will buy a new robot, so they will easily cover their investment cost on the automation, so here is in fact no risk in taking on a programmer the minute they dream up something that performs well on backtests. They may not wait for live testing.

So they go ahead and create a new automated forex trading logic. Then of course they need people to buy it. They might possibly do a little live testing, but that is risky! What if it made a loss? They won’t want to lie in this area the results so maybe it would be better not to test it live, but release it at once. 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 looks like it facility!

So what’s the problem with backtests? Nothing, if you think that future results will be the same as its results in the past. But hey, isn’t that the first thing you see in the small print on all investment documents? “Past results are not a guarantee of future routine …”

Take a simple example. You know that the odds of winning on black in roulette are less than 50%, don’t you? It’s less because of the zero. I think it is in this area 48.5%. But probability theory says that if you took a few hundred spins you would probably not get exactly that number of blacks. You might have 51% black for example.

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

On live tests, it would lose.

Sure 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 trading logic based on backtests. And I believe that is why they often do not work.

I’m not saying that you shouldn’t use robots, not at all. An automatic forex trading logic can be a wonderful tool.

I am simply suggesting that you should consider how they have been tested. I would not buy the latest forex robot the minute it comes out. Wait a couple of months, mind the 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.