Thursday, October 22, 2009

Forex Expert Advisors : Robominer and GT-Shadow, an Unbiased Review

Many of you may have read my reviews on the Robominer expert advisor. During the last week, there have been some interesting discussions at the robominer forum which have led me to write a third review with all my new perspectives and balanced views about this expert advisor. With this review I plan to analyze the system in depth and give my unbiased opinion about it, its perspectives as a long term profitable trading system, its risks and its trading mechanism. This review will replace all my former reviews on the robominer EA which will be deleted after this post comes out. However, this review keeps the link from my former reviews as a way for people to get here and read this new perspective.

First of all, let me say that the creator of the robominer EA does a good job at explaining the robot's trading mechanism and the way in which this trading system trades the forex market. The robominer EA is a grid trading system which tries to capture profit by opening trades towards the median price of currency pairs from "similar" economies such as the EUR/CHF and the AUD/NZD. The problem with this trading methodology is that it is subject to large levels of open draw down because positions have no stop loss and the trade "assumes" that the market will come back to hit the take profit of the orders. As you imagine, this EA will many times open trades against the trends when price is moving to test out the range "extremes".

The robominer system has been tested extensively during the past 1,2 years by the EA seller and many other independent testers, being the most prominent of these reviewers pipcop which has tested the EA for a little bit less than a year. With no doubts, the trading strategy has worked for this period of time for the EUR/CHF and the AUD/NZD, this can be seen perfectly on the one week charts of these pairs which show how the EA has been able to exploit the regression of the pair's extreme values towards the central point of the long term (5-10 year) range.

Can grid trading be a profitable strategy under certain market conditions ? Yes, without a doubt, grid trading can generate money from these returns towards median price but its reliance on the absolute range makes the trading strategy faulted. Should you not use grid trading systems ? Well, the answer is, it depends. What do you want ? If you want an EA that self adapts to the market and is able to trade with minimal intervention from you, then the answer for you is no, do NOT use a grid trading system because they expose your accounts to excesive open draw downs if they are just traded blindly without any supervision. If you want to get profit out of long term ranges but you know when a grid trading system can accumulate potentially hazardous positions then my answer would be yes, use a grid trading system.

It is a true that any grid system will, eventually put people's accounts in jeopardy, this is not something I am making up or something that will never happen. No matter the range, the currency pair, etc, a grid trading system will always find itself outside of the range with a lot of accumulated open draw down positions. This will happen because in the long term, small economical differences will cause a currency to slowly appreciate over the other. This is a fact and it is reflected in the ten year robominer backtest shown below (statement available here). This was the ONLY ten year backtest (from 1999 to 2009) I could do without an account wipeout before 2004. If you use the current level of risk used by pipcop and other reviewers you will see that it wipes accounts before 2004. This is a backtest done on the LATEST version of robominer II with default settings and a starting 100K balance. Does this mean you should discard grid trading ?
In my case, I am interested in trading a system in which I can rely on for the very long term, systems that prove to work under varied market conditions and that will never put my account in risk with lots of open positions with a high open draw down. Is this what the robominer offers ? I am sorry but this is not the case. I am not interesting in holding 3 years of open draw down positions, even if they come back to profit. The risk I run into when holding such large loses for such a long time is just very non conservative and, for me, a clear view of an uncapped market exposure.

Is there potential for profit using the robominer EA ? I would certianly say there is, but great care must be used when trading such an EA. For me, grid trading such long term ranges requires some careful analysis. I would, for example, only trade this EA when we are in the extremes of the ranges and breakouts have failed to happen, this will ensure a safe long term ride towards median price with much more moderate risk. Of course, this will happen once every 5 or 6 years so I would only trade the system for 2 out of every 10 years, when market conditions are most favorable to enter positions.

Is the robominer, under my definition, a long term profitable system ? Does it have the potential to generate long term profits during the next 10-20 years without an elevated market exposure ? No, this is not the case as it is shown by not only backtesting, but the trading system strategy in general. I would never put the robominer in a trading account and use it for the next 10-20 years, there is the very strong possibility that during that time it will hold excessive draw downs which will seriously compromise my equity. It does not adapt to changing market conditions and the fact that its market exposure is uncapped makes it a bold risk for long term trading.

Could it be used to profit while the ranges last ? Sure, people could trade this EA to profit from returns towards median price from the edges of the EUR/CHF and the AUD/NZD ranges. I would only use grid trading from the extremes as the most dangerous scenario is an overextension of the range with accumulated draw down from positions opened from places near the median price. Using such a trading system only from the edges of these very long term ranges would somehow further diminish the market exposure and diminish the amount of time people would have to hold onto this very long term open draw down positions.

I have to say that the robominer fulfills its promise as a grid trading system, it will generate profits and remain profitable as a range trading tool but as a long term trading tool to be used with no intervention it will puts people's equity at a very high risk. There are profits to be made with grid trading but the exact trading opportunities and trading moments have to be carefully chosen so that future draw downs are minimized. Remember that these systems are particularly dangerous in the sense that positions opened near the median price can cause heavy draw downs which will only become apparent in 2-3 years.

My advice ? If you are going to use a grid trading system you should be carefully aware of its logic and the risk in which it puts your equity. Grid trading systems are not systems to be left unattended and to be traded all the time. If you do so the trading system may cause you your whole equity. However, you can get profit from grid trading if you accurately time the moments in which you will open positions and avoid the generation of heavy draw downs by avoiding the entering of positions near the median price. After all, grid trading is one of the only ways to trade an inherent characteristic of the market, which is the development of ranges. However, grid trading assumes that a ranges is "all there is" and therefore it runs its greatest risk when the market trends away from the edges of the grid.

In conclusion, I would say that the robominer is a system that, according to my definition, is not long term profitable and non conservative. However, it can be used profitably if used accurately. Personally, I would not be able to sleep at night with positions holding a 50% open draw down and therefore I know this does not fit what I am comfortable with as a trader. Having an uncapped market exposure is not what I consider to be a long term viable way of trading the forex market. However, should you buy this system and trade it, you should be aware of all the risks it implies and the possibility that you will incur very heavy draw downs or even wipe outs during the next 5 to 10 years if you just "set it and forget it". To sum it up I have prepared the following small Q and A about the EA.

Can it generate profits ? Yes. How much profit can it generate "safely" remains an open questions. Backtesting shows that the current levels of risk generating 5-10% a month were subject to wipeouts in 2004. So now, based on backtesting I would say that a 70-100% profit every ten years seems reasonable. Backtests done with higher risk from April 2008 are consistent with the live results of both the author and the independent reviewers so there is no reason to believe that the backtest from 2000 that predict wipeouts are not realistic.

Does it have an uncapped market exposure ? Yes. The "capping" of the market exposure, in my opinion, must come from the trader when using grid systems. The trader must know when he/she should turn the system on and when it should be turned off.

Will it generate heavy open draw downs ? Backtesting shows it did. And surely trades opened near the median price will generate a lot of draw down when the currency pair heads towards the extremes of the range. The problem is that there is no guarantee that this trades will return to their take profit levels, this is the dangerous assumption made by grid trading systems.

Is it long term profitable ? As I told you, under my definition, it is not, it would be hard to believe that these pairs will hold their ranges for 20 years and the EA lacks adaptability towards changes in the median price.

Would you ever trade a grid system ? I would never assign more than 10% of my forex investments to grid trading because it does not fit my trading style and I believe that the absence of a closing mechanism is not a reliable path towards long term profitability. However, I would always consider allocating a small percent of my trading funds to an account dedicated to grid trading as long term ranges do remain inherent characteristics of the market. That said, I would not use the robominer EA for this purpose.

Now that you have the information, it is up to you to decide if this type of EA fits your trading style and if you would be comfortable trading a system that is subject to unlimited open draw downs while it profits from long term ranges. In my opinion, why would you use such an EA when there are many other commercial and free solutions that do not put your equity at such a large risk and generate similar o superior profits ?

If you would like to learn more about the systems that I use, how they adapt to the market and how you too can program and trade your own long term profitable trading system as well as freely available profitable systems please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

1 comment:

rose said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


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