Saturday, October 24, 2009

And Then There Were Non...

As you may know from my previous posts about the way in which expert advisors are reviewed by most independent testers and forums, I strongly disagree with the way in which the evaluation of trading systems takes places. The reasons for this range from the sometimes mindless testing to the "test and drop" tactics used by many of these expert advisor reviewers. From now on I will refer to "expert advisor reviewers" as both people who have websites that review experts and people in forums who review free or commercial systems.

Today I want to write about a phenomena I think is happening and will happen in the future with most independent testers in the world of foreign exchange automated trading. This phenomena, which is related to today's post's title is related to the fact that most expert advisor reviewers follow a "learning" curve which eventually leads to a total lack of expert advisors to evaluate and a complete lack of interest in the testing of long term profitable expert advisors.

For me, expert advisor reviewing happens to most independent testers in "stages" or "steps" . The first step, which is when people start to test many expert advisor systems is what I call the "charmed" phase. Along this step, an EA reviewer becomes very excited about testing systems and decides that his objective will be to find a profitable expert advisor, note that no strict criteria for a "profitable" expert advisor exists for them and most of the time, these reviewers base their evaluation on their personal criteria which, more often than not, is not geared towards what is considered by me (and experienced traders) as "long term profitability", in fact, most of the time this criteria is even fairly opposite to that.

After testing a whole bunch of experts, the reviewer goes through the next phase which is what I will call from now on the "elimination" step. In this step, the expert advisor reviewer "eliminates" trading systems that do not fulfill his criteria for "profitability", most of the time long term profitable experts are eliminated in this phase as they almost all the time fail to generate short term profits of such magnitude as those generated by unprofitable systems like grid trading system, Martingales and scalpers (note that eventually these profits will all be given back by unprofitable trading strategies). The key factor here is that the elimination phase usually happens within less than a year. That is, experts don't have any opportunity to show their potential, even more, most reviewers don't seem to have a criteria in the aforementioned charmed phase in which they can decide which experts are and which ones are not worth evaluating.

After the elimination phase, most of the time only experts with very unsound trading methodologies, which were the experts able to generate high short term returns, are left. These experts generate profits for even one or two years (best case) after which they wipe accounts. Here is when most expert advisor reviewers enter what I would call "desperation". In desperation, the EA testers find themselves with no expert advisors and with the possibility of doing one of two things. They can return to the "charmed" phase and get new experts and repeat the whole process or they can go another way and start analyzing what really made each expert they evaluated trade like they did. After this, the EA reviewer can build a real criteria for long term profitability and start analyzing systems before committing time and resources to experts they know are not long term profitable.

Several expert advisor reviewers are near their desperation phase right now and I am very interested in what they will do to move forward. It will be very interesting to see other people's criteria for long term profitability as well as their own programming and trading systems evolving out of this.

Sadly, in the end most reviewers just throw the towel with the firm belief that it is impossible to find a trading system that is long term profitable. However, I have learned, through the whole process above, that such profitability is achievable and that reliable testing and evaluation has to be done in a deep and critical level. If the evaluation of experts and the building and trading of long term profitable systems interests you 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 !


Glen said...

The more I read your work, the more I believe that you are right. I frequent several forex forums (currently 4xproject holds my interest), and I sense the desperation in the commentary for an easy way to make money in forex. I've looked at this for maybe two months now, and I've slowly come to the same conclusion as you - there are phases one goes thru on the road to realization there is no easy way, and that at least 99% of the 'bots in forex cannot make you money in a real, live, environment where everyone, including brokers, is out to eat your lunch and prevent you from taking 'easy' money from the markets.

I do, however, know for a fact that automated trading for profit is possible, and that there are several players in the stock markets, bond markets, forex markets utilizing automated 'bots to generate small profits over and over.

I also have come to realize, while working on modifying an EA myself, that someone who finds a way to extract money from the forex market using an automated EA, would never release that to the world for $100 or whatever. Why kill the goose that lays the golden egg? Really, I believe my work will produce a little robot that can make some money from forex markets. But if I do, I would never, ever consider selling it or even letting someone look at it. My view has consolidated into this: if you want to do automated forex trading, you are going to have to find your own specialized niche, make a personalized EA (through the mt4 language) and milk it for all it's worth.

Thanks for all the work you do, you're doing great stuff.

Daniel said...

Thank you for your comment Glen ! As you so clearly point out, there is desperation and there is the ever ending search for the EA with the Midas touch.

On the contrary, I disagree with your opinion about the release of a profitable EA "killing it" by rendering it unprofitable because of the massive use. This is something I consider very interesting, which is that profitable trading systems are very hard to trade for regular people who are searching for "easy money" and therefore these profitable systems are protected in this sense from the market.

Take for example the turtle trading system, a long term profitable, proven system that has worked since more than 2 decades ago. Why don't people trade it ? Because it takes a lot of knowledge to be able to trade a system that has 2-3 year long period draw downs which are ended by very long trend following trades that generate 10-20 time more profit than the loses.

Of course, if you tried to sell such a system for 100 USD, no one would buy it, no one would want to trade something that promises much less than the other 99.999% of the experts out there.

It is not hard to make a long term profitable EA, my work on ATR adjustments demonstrates that I have taken half a dozen unprofitable strategies and made them profitable with the introduction of dynamic money management. However, all these strategies would never be traded by the average Joe looking for an easy way to earn money. As Richard Dennis said about his turtle system : "I could publish it on the newspaper and no one would trade it".

Again, thank you for your contribution Glen, I am glad you enjoy my posts and I hope you keep on visiting !

Best Regards,


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