Saturday, June 20, 2009

You think your expert advisor is profitable ? Profitable, may not mean Profitable

Of all the misconceptions out there about automated trading systems and the way they should be tested and traded one of the worst ones is the misconception about expert advisor profitability. This is the reason why most people fail to use expert advisor solutions effectively and the real reason why most of these people lose their money with forex automated trading systems. In an article I wrote a small while ago, I exposed the reasons why the current way in which expert advisors are tested does not work, and does not do anything to show you the real potential and profitability of an expert advisor.

What do we call a profitable expert advisor ? This is the first question that most people have when they start trading the forex market and the reason most of them fail to find profitable expert advisors is because the intuitive definition of a profitable expert advisor is flawed. Intuitively, you would say that a profitable expert advisor is an expert advisor that makes money. That is an oversimplified definition of the matter. Sure, making money is a necessary conditions, but it is not everything you need to call a system profitable. A system can make money and be unprofitable. The same way in which a trader can make one thousand dollars one day and wipe the account the next.

There are several examples of expert advisors that make money and then wipe accounts, systems which can take even a year or two to do so. For example, every Martingale system out there will eventually wipe your account because the market exposure of the system is increased exponentially. Systems with high risk to reward ratios show you the same thing. A system that you can forward and live test for a few months, even a year with good results, then your account is wiped out. So here we come to the same point. The mere results of forward or live testing are no guarantee of profitability because the system itself must have a logic that targets an inner characteristic of the market.

Most people also reject profitable systems, a reason why I include the god's gift ATR ea with my ebook and my newsletter subscription. Most people would just trash a system that they live test for three months and takes mostly loses. Why ? Because people want instant gratification and they do not want to run something that takes all those loses, they simply do not understand the logic of the system and the reason why these draw down periods exist. Later they would find out the system came out of the draw down and made 3 times more in profit during one later month. This is the same reason why the creator of the turtle system said he could publish his rules on the newspaper and nobody would trade his system. Profitable mechanical systems are hard to follow and require your in depth understanding of the logic if you really want to feel comfortable with them. Most systems out there will give you your instant gratification, they will trade a lot, start to fill your account with money and then wipe it all. They are the absolute opposite of a long term profitable trading system, they use market randomness not market logic as a way to profit.

You guessed right, in order to learn which systems have long term profitable logic and which ones do not, you would need to know the codes, now how to program and now the strategy inside in and inside out. It could not be that easy right ? you thought that by running a program made by some other guy you could earn a living without working ? Come on. If it was that easy would anyone out there work a 9 to 5 job ?

If you would like to learn more about commercial and free automated trading systems I have tested 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 !

2 comments:

Digitalis said...

Hi Daniel, I have been trading a weekly breakout system very profitably for a while.

I need it written as an EA, so I can optimise it with MT4's Strategy Tester.

Would you be interested in writing the EA, it might just be a modification of your existing 4-week EA?

If so, let me know the best way to get in touch with you.
Thanks
David

Daniel said...

Hello David,

Sure, I would be glad to help you. Send me an email to ekans_@hotmail.com and we'll get in touch,

Best Regards,

Daniel

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