We've all seen the hype - automated trading robots and expert advisors promising astronomical returns and quick profits. You may have wondered whether these claims could possibly be true. Maybe you've even spent your hard-earned money on one or more of these products, only to be disappointed in the results.
I can't tell you whether the latest offer to double your money in 5 weeks is real or not. (Though it probably isn't). But I can tell you what to look for when evaluating any forex robot or expert advisor.
The Folly of Backtesting
Most people who sell expert advisors and robots back up their claims with an impressive historical backtest that shows a perfect linear equity curve and huge profits. Now, we've all seen EAs that look great after optimization, but perform poorly in real-time trading. Why is this? The answer is called "curve-fitting."
When you optimize a trading strategy, the greater the number of settings optimized, the more likely that the results will be fitted to the historical data. An EA that has had all of its settings optimized at once can produce very impressive backtesting results that will trade poorly going forward.
Another consideration is how often the robot trades. Does it only trade at the close of the bar, or does it place trades intra-bar using a very short timeframe? Tick data during backtesting is extrapolated, and not 100% accurate. Therefore a short-term "scalping" EA will perform much differently than its backtested results.
In a nutshell, you shouldn't trust any backtesting results for a commercial EA unless you performed those tests yourself, and even then you should take them with a grain of salt. Don't spend your money on a commercial trading robot unless you see real trading results from other users. Even trading results from a demo account are better than a backtest.
High Risk: The Key to Large Profits - and Losses
So maybe you have found an EA that produces outstanding profits, and you've got the trading results to prove it. How does it perform so well? Lets consider an example of a modest automated trading system, one that uses appropriate money management and risk control (i.e. stop losses).
A good, low to moderate risk automated trading system can make profits of 5-15% a month. But not every month is a winner, and some months may make more profit than others. On the other hand, our outstanding EA is doubling its money every 2 months. Which would you choose?
Stories abound of traders who have used such trading systems, raking in the profits until a large loss takes a big chunk out of their account, maybe even resulting in a margin call. Why does this happen?
The answer is that the trading system was taking on too much risk. High risk means trading many lots at once, doubling after wins or losses and using very large (or no) stop losses. These systems can work well for a while, until the market suddenly turns against them and you're left with a very large drawdown.
It's recommended that you use no more than 1-2% of your equity per trade, and that you limit your total loss per trade to an amount that you're comfortable with. A system that trades many lots at once and doubles lot sizes will quickly assume far more risk than is advisable.
So next time you see an EA or trading system that promises, and maybe even shows, substantial profits, consider the risks. If you choose to trade a high-risk trading system, keep your lot sizes small and don't let equity losses exceed a predetermined maximum risk level.
An Alternative to Robots and EAs
Perhaps you're tired of spending money on EAs that don't work, and you've been unable to find an automated robot that offers actual trading results or a sane risk profile.
It's possible to evaluate and trade hundreds of profitable trading systems, all with actual historical trading results, without having to pay hundreds of dollars. Online automated trading services such as ZuluTrade, Rent A Signal and FX-Auto allow you to experience the benefits of automated trading without having to spend money on robots or expert advisors.
All of the trading systems show actual forward-tested results, and in many cases there is live trade data to back it up. There's no software required, and trades are automatically placed in your account. The best part is -- it's free! Read on for more information and reviews on these automated trading services.
Remember what you've learned about high-risk trading systems. You will encounter systems that are very risky, but if you look, you can find trading systems with low to moderate risk and a smooth equity curve. Pick a few of these, set your lot sizes appropriately, and watch the profits roll in.
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