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Automatic Forex Trading Systems: Why Do They Lose Money?

There is a new automated forex trading system almost every week now, it seems to me. All of them show profitable results on paper but when we get into live testing the bottom line can be very different, as many of us know from bitter experience.

So why does the dream crumble to ashes? Does the fault lie entirely with the user and their settings? Did the developer advertise fake results? Or is there some little known universal law that dictates that as soon as a forex 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 you too perhaps.

But really I do not think it’s any of those reasons. Maybe I will be criticized for this but here is what I believe actually 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 devise a new one and backtest it), pay a programmer to automate it, and then to recoup the cost of the software development and more besides, they sell it to you and me.

The critical question comes in the very first step. If the system has been working for the developer for a long time, fine. But in most cases they move much too quickly. They are relying to a greater or lesser extent on backtests. They know that there is always a market for new robots, so they are sure to cover the cost of the programming, so there is in fact no risk in hiring a programmer the minute they dream up something that performs well on backtests. They do not wait for live testing.

So they create a new automated forex trading system. Then of course they need people to buy it. Possibly they might do a little live testing, but it is risky! What if it made a loss? They won’t want to lie about the results so it might be better not to test it live, but release it to the market right away. People believe what they read and many of them will buy on the backtest results by themselves. Quick! the expert thinks, Let’s release it now while it still seems that it works!

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

Take this simple example. You know that the odds of black winning at roulette are just under 50%, don’t you? The zero makes it less. I think it is around 48.5%. But probability theory says that if you took 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! Great, so now I can develop a robot that always bets on black …

On live tests, it would lose.

It is true that the foreign exchange market is a little more complicated than a roulette wheel, but still I think this is basically what developers do when they build a forex automatic trading 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 very profitable tool. I am only asking you to look carefully at how they have been tested. Do not rush to buy the latest forex robot the minute it comes out. Wait a few weeks at least, check the forums and see how other people like you get along with new automated forex trading systems before you thrust your money into the developer’s greedy hands.

Jason Cline is an online journalist writing about automated forex trading system programs and the foreign exchange market for several websites.

See his opinion of the best seller FAP Turbo in his FAP Turbo review

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