Killer Trading Robots (and how to avoid being their next victim)

I sometimes like to turn trading robots loose in a demo account, just to see how fast they can burn up $50,000. As it turns out, pretty darn fast. 🙂

trading robots

Trading robots, or EAs (expert advisors), are touted as the Holy Grail of trading. You just turn one on in your account, and it makes you a millionaire – you don’t even have to watch it!

Yeah, well, here’s the thing…If it were that easy, we’d all already be millionaires.

Trading robots are everywhere. I get at least one email a day advertising one, assuring me that it wins “95% of the time!” I’d guess that at least half of the forex trading strategies advertised for sale are robots or expert advisors.

There’s just one small – very, very small – just one teeny-tiny problem: They don’t work.

Oh, some of the better ones work for awhile. They may even work very well for awhile. But inevitably, they stop working. Worse yet, they don’t just stop making money; they start losing money, hand over fist. Before you know it…”Wow, that thing burnt up the whole $50,000 in my demo account!”

Okay, but WHY don’t they work? That’s easy enough to lay out for you. Here you go:

1 – Changing market conditions. The conditions in the forex market, the characteristics of the market flow, are in a constant state of flux, change. For example, in the past month we’ve had ridiculously small daily trading ranges. Yesterday, the total trading range for Eur/Usd wasn’t even 40 pips! That’s a massive shift from the norm, which is trading ranges of about 80-100 pips a day. The market changes month to month as well – like, December is a notoriously slow month, whereas January is extremely busy. All of these trading robots are designed to operate with certain basic parameters – like the average daily trading range – and when those parameters significantly shift, then it throws off the robot’s calculations, projections, targets, everything. Each shift in the dynamics of the market impairs the robot’s ability to perform.

When someone is trying to sell you one of these mindless robot traders, and they’re showing you its outstanding past performance, that stellar performance is over a period of time that the robot has been optimized for. That is, the various parameters, adjustable inputs, etc., have been adjusted so as to maximize performance within those specific market conditions. But when you buy the robot, market conditions have changed again and – big surprise – it doesn’t work like that amazing “past performance”.

A few robot sellers will at least be honest enough to tell you that there are half a dozen or more “input parameters” that need to be constantly adjusted in order to keep up with ever-changing market conditions. Unfortunately of course they can’t tell you exactly WHAT adjustments to make, or exactly when to make them, or how in the world you’re even supposed to figure all that out.

2 – Disastrous money management. Here’s the pitch – “Only 4 losing trades in 3 months!” And here’s the reality – if you look closely at all the data in those past performance records, you might notice the fine print that shows “Average winning trade = $20”, “Average losing trade = $2,000”. Even at their best, most of these robots will still kill your account, because their losses are HUGE – much too large to bear, much less overcome. What happens if the first trade you open with your new trading robot turns out to be one of those $2,000 losses? Even assuming you’re not completely wiped out, it’s going to take you 100 winning trades in a row just to fight your way back to breakeven. (And if you happen to manage that – without first encountering another $2,000 loss! – how are you going to feel about having 100 winning trades in a row, and all you’ve got to show for it is the same amount of money that you started out with?)

money management

Another money management kill factor inherent in a lot of these trading robots is that they use some form of martingale betting strategy. If you’re not familiar with martingale systems, they’re a “double your bet” strategy – that is, after a losing bet, you double the amount of your bet. If you lose again, you double your bet again. You keep doing that until you win, and then return to your original bet. Well, as attractive as the martingale may sound (eventually, yeah, you WILL win a bet), the inherent flaw in it is that you need an unlimited supply of funds. If you don’t have that, then at some point you will simply run out of money to play with before you get to that elusive win which would have set you right again.

For example, if you start off with just a $5 wager, 17 losses in a row would get you to the point where your next wager would have to be a whopping $327,680! To put it in forex trading terms, if you started off trading 10 micro lots, putting up $20 in margin money (that’s with 500:1 leverage), if you had 9 losses in a row, you’d be down over $10,000, and needing to put up over $20,000 in margin money in order to make the next trade! – Lose that trade and now you’re out $30,000 and need to pony up another $40,000 to keep going. It’s simply not workable.

3 – Robots can’t feel. Herein lies the ultimate fatal flaw in robot trading. In my recent “psychology of trading” article, I noted a common characteristic among winning traders is that they have all honed their intuition and developed a feel for the market. They can sense markets shifting before price actually reflects the shift. And their feel for the market is an important component of their overall trading edge. Robots, alas, will never have a “feel” for the market. Robots can only calculate numbers – they can’t process “the big picture”.

A robot can see that Aud/Usd is down 80 pips on the day and threatening to take out a major support level just a little lower – but they can’t see that (A) the market has already tried, and failed, four times to take out that support, (B) that Eur/Usd and Gbp/Usd, both of which were also down big on the day, have started to move back up, or (C) that there’s a data release due out in about five minutes that is likely to be bad news for Usd across the board. And therefore, they can’t “see” that the smart money play is to either close out your short position, or perhaps even turn around and buy long.

Trading robots are just like other robots – they can be helpful tools, but only when directed by a person. An expert advisor may possibly provide you some advice to consider, but you have to make the final trading decisions. The best traders are actual people – not robots. And the secret to trading success is having a simple trading strategy that gives you some kind of edge (like the Double Trend Trap), and honing your skills as a master trader. I’ll be happy to help you with that any way I can, but, sorry, I don’t have any robots I want to sell you.

Jump in and comment below! – I like hearing from you. If you don’t say anything, I start thinking maybe I’m the only person in here…and then I get scared when it starts getting dark.

Peace of Christ, best wishes in everything,

Jack Maverick

The following two tabs change content below.
Winners Edge Trading was founded in 2009 and is working to create the most current and useful Forex information and training available on the internet.

Winner’s Edge Trading, as seen on:

Winner's Edge Trading in the news