Forex Currency Trading Systems: Why Don’t They Work?

February 10, 2009 · Filed Under Finance

We see new automatic forex trading systems almost every week now, it seems. They all produce amazing results on paper but when we get into live testing the results can be very different, as many of us know from bitter experience.

So why do the hopes turn to dust? Is it due to the user and the settings that they chose? Did the developer advertise fake results? Or is there some obscure universal law that dictates that the moment a system is automated, the market will alter its course to prevent it from working?

Sounds crazy I know but I’ve wondered about it sometimes and you too maybe.

But honestly I do not believe it is any of those reasons. I may be hated 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 working for them (or devise a new one and backtest it), pay a software developer to turn it into a robot, and then to recoup the cost of the software and more, they sell it to traders like you and me.

The critical question comes in that first step. If a system has been working for the expert for a good long time, great. But most times 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 can easily cover the money they put in to automation, so there is in fact no risk in them giving it to a programmer as soon as they think up something that gives the results on backtests. They may not wait for live test results.

So they go ahead and create a new automated forex trading system. Then of course they must market it. They might do a small amount of live testing, but that’s risky! It might make a loss. They couldn’t lie about the results so maybe it would be better not to test it on the live market, but release it right away. People tend to believe what they read and too many of them will buy on the basis of backtesting alone. Quick! the expert thinks, Let’s get it on the market now while it still seems that it works!

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

Take this simple example. You know that the chances of winning on black in roulette are just under 50%, right? It’s less because of the zero. I think it is about 48.5%. But probability theory says that if you recorded a few hundred spins you would probably not get exactly that many blacks. You might easily see 51% black for example.

So imagine if you did that, looked at the 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.

Of course the foreign exchange market is more complex than a roulette wheel, but even so I think that is fundamentally what developers are doing if they build a forex robot based on backtests. And I think that is why they often fail.

I do not mean don’t use forex robots, not at all. An automated forex trading system like FAP Turbo can be a wonderful tool.

I am just saying please look carefully at how the systems that we use have been tested. I would never grab the latest forex robot the moment it is launched. Wait a couple of months, watch the forums and find out how other people like you get along with new automatic forex trading systems before you thrust your money into the developer’s eager hands.

Jason Cline is an online journalist writing on automatic forex trading systems programs and the fx market for a variety of internet sites.

Find out what he thinks of the top seller FAP Turbo in his FAPTurbo review.

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