I know that many of you may have asked this question one or several times. What would happen if there was a mainstream succesful forex expert advisor and we would all buy it to make ourselves profitable in the market ? Let us say that the ea was backtested since 1999 and forward live tested from a period of 5 years, we all want to buy it because it seems so profitable, then what happens ?
I have given this question a lot of thought because it is the basis of what would happen when large mases tried to use the same piece of automated software. Since the software has a fixed logic, the first thing we would find is that too many people would want to enter the market at a certain price level. This has some real effects if the orders are truly executed on the market and not run on bucket shops and even if they are run on bucket shops the provider is sure to do something if he wishes to stay out of bankrupty. So what are these effects?
The first thing that would happen is that the market would lack enough volume to fill all the people at the same time, if 30,000 people want to trade one lot of currency at exactly the same price at exactly the same time then the market wouldn't have the liquidity to deal with those orders. If there is no liquidity to deal with the orders then the price obviously goes up or down after the market gets saturated filling the orders. Then of course, holding the asset has become valuable and the people who would sell it are going to hold onto it while the people who buy it are going to pay higher and higher prices. This has the obvious effect of widening the currency spreads because there is way too much volatility on the market.
The second effect comes from people overloading the market liquidity at that price, this of course would cause massive slippage on most of the people trading the system. Indeed, manual traders would start to trade the moves caused by the automated trading community because what happens can be somehow predicted because the system is absolutely systematic. Now, the golden question is, would all of them be profitable ?
The answer is the obvious, no. Massive usage of an automated trading system would render it useless because of all the facts explained above. If everybody starts to try to enter the market at the same place, they have changed the inherent dynamics of the market for which the ea was built, hence, the ea does not work anymore, because the market at that point is no longer based on human psychology but in computer logic.
In fact, trading an ea is like droping a rock in a water pond. The effects of your ea are the ripples on the pond while the pond is the market. If the ea is like a small pebble, the market will not even notice it and continue behaving as it has always done. If the effects of the ea are like those of a boulder, then the market dynamics would definetely change. Anyway, the 9:1 rule will in the end prevail. In the end, 90% of forex retail traders will lose their money, there is no way to change that.
If you would like to learn more about commercial and free (non mainsteam) automated systems I have used and reviewed 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 !