Conclusions on EA trading.
I figured I had to post this to cover my experiences with Forex EAs over the past few months to warn absolute newbies as to what they are getting themselves into. Forgive me for being alarmist in nature, but the following things I feel, just have to be said:-
Let’s get this BIG one out the way first:-
- Forex robot trading is NOT I REPEAT NOT a get-rich-quick scheme!
You can make more money by trading manually! Just take the time to learn how to do it. Get an education. Find a nice set of indicators to use. Follow the news. Etc. … but oh no, you won’t do that will you because you don’t want to invest the time and money into that. You just want to have the computer do all the work…while you get rich lying on the beach… hence your attraction to trading robots.
Many overhyped commercial EA are clearly marketed as some kind of holy-grail, get-rich-quick scheme that will make you fabulously wealthy. Truth is, a lot of commercial EAs (and even lots of free ones), I would simply NOT TRUST to run on a live account for a variety of reasons I will explain below. You really have to wonder - if somebody made a successful trading EA… why would they share it? Why would they need the money if it trades so well anyway? Why invite thousands of other people to use the same trading system which will run the risk of be detected by brokers when they see it used too commonly, and shafted in a way to eventually make them unworkable?
The answer is simple… a good majority of EAs are absolute rubbish. These people KNOW that the only way to make money from the EA is not to use it themselves, but to sell it to as many people as possible, with the lure of making lots of money!
DON’T BE FOOLED. There are many EAs which verge on being scams, or are just outright dangerous to use live.
Many programmers who are capable of programming EAs do not run them on live accounts AT ALL! What’s worse, some of the free EAs these people produce are snapped up by unscrupulous people and sold off as the next “holy grail” EA… which brings me to my next point:-
- There is NO Holy Grail EA!
You can FORGET IT - unless you manage to program it yourself, and then KEEP IT to yourself.
In THAT case you’re probably already a skilled manual trader anyway, and you would not be hunting for a holy grail.
Secondly, there is NO serious robot that goes without losing a trade. Not even the ones that say that they cannot lose.
Typically, when someone mentions that there is a robot that doesn’t lose, they are typically referring to a robot that allows MASSIVE drawdown and simply will NOT close trades unless they go into profit. On a technicality, you can say that such robots do not lose… UNTIL they MARGIN CALL your account!
Even if they magically didn’t lose, having drawdown come close to or nearly wipe your account out is NO WAY to trade responsibly!
All robots can, and WILL LOSE at some point. The thing to keep in mind is that, despite the losses, it should be PROFITABLE overall.
So then, what are the characteristics of a BAD Robot?
- MASSIVE drawdowns/stop losses!
It goes without saying, that putting a robot in charge of a live account and letting it risk a good chunk of it to grab a small profit is utter MADNESS. Oh sure, the robot might profit for a few months with such a plan, but when it MISSES… and all it needs is one miss… BYE BYE PROFIT. Even if it DIDN’T miss, you will not be able to run the robot and get any sleep. You will more likely panic and try and shut down open trades, and if you do that, there’s a possibility that the trade might have swung around! You would have blown up a trade FOR NOTHING!
What’s even WORSE than trading with huge stoplosses, are NO STOPLOSSES AT ALL! Again, PURE INSANITY!
Avoid these EAs LIKE THE PLAGUE!
- Beware the martingale!
There are some nasty commercial EAs (and a number of free ones), which include a martingale system. A martingale system is essentially a GAMBLING system (you can read all about it on Wikipedia). In a martingale system, when the robot loses a trade, it doubles the lot on the next trade in order to get that lost money back. That’s all well and good if the next trade is a winner - you’re back in the game!.. but what happens if it loses the NEXT trade too? Well, you’re account has a nice BIG hole in it, and the robot is betting even MORE money that will win the next one… BUT WHAT IF IT DOESN’T? I’ll tell you what happens… the robot DESTROYS your account!
A martingale system can seem profitable initially for a few months… but all it needs one a series of losses in a row to wipe your profits RIGHT OUT! It may not happen in one month, it may not happen in six months, but believe me… one day, when you least expect it, it WILL HAPPEN!
- Skewed backtesting!
Commercial robots usually sell themselves with these. You have a nice graph which shows you how it managed to turn $10,000 into a brazillian dollars in the space of one year only. WOW, RIGHT?
WRONG.
It is VERY easy to optimize the settings on ANY EA in order to make it appear profitable over one or two years worth of data. HOWEVER… drop that EA over a DIFFERENT year’s data, with DIFFERENT market conditions… and BOOM! There’s a distinct possibility that it would have BLOWN THE ACCOUNT UP!
Simply speaking, an EA that CANNOT survive and thrive on more than 10 years of historical data is NOT WORTH the bytes it takes up on your computer’s hard drive… and even THEN you have to understand that it could have EASILY been backtested and optimized to fit 10 years to make that equity curve look pretty! Who knows what the next 10 years will hold? If the robot CANNOT assess changes in the market which happen from year to year, again, it’s a WASTE OF YOUR TIME!
No robot knows the future! That goes without saying really…
- Beware the brokers!
A lot of profitable EAs revolve around scalping the market. Typically, they take advantage of range trading that happens at a certain time period, and makes small trades based on the fluctuations. In order for these kinds of trades to work, however, your broker needs to have low spreads on the pairs it works on. If your broker has HIGH spreads, then these scalping robots will simply NOT work, or at least WORK badly and not in your favour!
Here’s the thing though… there are many unscrupulous brokers out there with crazy low spreads who are untrustworthy bucket shops. There are more reputable brokers who have high spreads but won’t like you taking all their money with scalping. Do your research on how your robot trades, and choose a broker wisely!
OK OK, so despite all this, you still want to use a trading robot anyway.
Then understand the following:-
- Do your research!
There are websites, review blogs and forums out there that regularly backtest and forward test commerical and free EAs. Careful who you trust and what you want to believe… having said that, I have never seen a forum post with someone saying how wealthy they became from forex robot trading. I’m not sure anybody would be game to say it if they did.
- DEMO test, DEMO test, DEMO test
ALWAYS ALWAYS ALWAYS demo “forward” test your EAs on a demo account for AT LEAST a month before even considering putting them onto a live account. Forward tests are more trustworthy than backtests. You want to see how it trades, what the drawdown is like, how it handles losses, and what to expect from month to month, and how it deals with the broker’s order execution shenannigans. If YOU are NOT comfortable using the robot on a demo account, DO NOT use it live!
In fact, many EA creators who are smart enough to develop these robots, simply do NOT use robots live AT ALL!
- Create a free EA trading strategy.
Using a free EA strategy can be profitable, but still requires a fair amount of work. The good news is that there is no risk of the broker being able to predict just what the heck you are up to with much accuracy… unlike the hordes of “commercial-holy-grail-of-the-month” robot drones.
If you are using a free EA, you will have plenty of options to play with. Most of the free EAs simply won’t survive a 10 year backtest anyway. If you try to optimize them for 10 years, you will find that they’re not even very profitable over that period of time. In essence, all you can do is optimize for maybe 1-2 years, and RE-OPTIMIZE them every month to take on board the latest market conditions with fresh data.
If you are going to go with a free EA strategy, then hedge your bets by using a slew of optimized and tested robots, manually intervening if you don’t like where they are going. With this kind of strategy, you had best use an equity managing EA in order to prevent your equity from falling below a certain level, and you will have to keep a close eye on all your trades and the win:loss ration of your EAs, moving out and dropping in different EAs to handle the market on a regular basis. It’s not a hands-free strategy, but at least you will have some control over how you trade, rather than blind faith in a blackbox robot.
The best you can hope for is a small percentage of profit every month from such a trading strategy. You will not get rich quick… but you may get rich slowly, especially if you back that up with some manual forex trading skills.
- Retract your initial investment AS SOON AS you can!
It goes without saying, you don’t want to lose any money in this venture, correct? Well then, as soon as you can, withdraw your initial investment. Then your EA can happily work away and blow your account up and you will have at least not lost your shirt. You won’t have gained anything either, but that’s the nature of the forex robot lotto.
- NEVER open a live account for a robot with more than $1000
After all you have read, you STILL want to go ahead with this… OK then, the conclusion that I have come to when it comes to robot trading, (ESPECIALLY if you are using a commercial “black box” EA) is this:- YOU ARE GAMBLING. Whatever money you let an forex robot play with, is essentially DEAD MONEY! Forex is risky, and if you haven’t lost money very quickly in Forex trading, you’re definitely going to learn ALL ABOUT IT! Never risk money that you aren’t comfortable with losing completely!
You are gambling on the fact that the black box robot that somebody created is actually going to work and continue to work - since you have no idea how it operates! ANY money you put into a live account with an EA, has a good possibility of vanishing into thin air!
If the EA is as good as it says it is, it should be profitable in the long run, regardless of how much you put in, right?
That is, if you intend to quit your job and live off of this for a number of years, and if it really is the holy-grail you have been made to believe it is, IT HAD BETTER! Therefore, it should survive off a small account and with any luck, it may turn into a million dollars in a few years. Good luck with that. It’s an expensive lotto ticket. Let’s hope it pays off and you at least profit a bit!
Best of luck with your robot trading everyone! You’ll need it in spades!
If I missed anything, please let me know. I’m all ears.
