Tuesday, January 5, 2010

The Trick of Tricks... Deceit by Multiple Testing

I did think I had figured out all the ways in which expert advisor sellers could trick people into buying things that did not work in the long term. I certainly thought that I had gone through so many websites that it was now almost impossible for expert advisor sellers to surprise me with something new. However I recently thought that there is a very mean and powerful way in which expert advisor sellers can deceit customers and this tactic could be or already have been used by some sellers out there. Today's post will focus on the analysis of this deceit tactic and how we can protect ourselves from falling into this trap.

What would you say if you found an expert advisor sales page in which you had a one year live account with a 200% profit with verified investor access ? The EA also does not use any unsound trading tactics. Would you buy the expert advisor ? All the trades are absolutely legitimate, made by the trading system. Is there any way in which the EA seller could have cheated you into buying something that does not work, even if the EA has been trading for so long ? Is there any way in which the live statement could have been fabricated ?

Yes and no. Definitely the expert advisor seller cannot forge a one year live test with verifiable investor access, there is just no way to do this. There are only two options then regarding the live account : either it was traded by the EA or it was manually traded by the seller. Now if it was manually traded by the seller. Then the seller should become an account manager if after one year he/she was able to pull 200% with a decent draw down, that is definitely a good thing for a manual trader. But there is a third option... The trick of tricks.

What is this trick of tricks. Simple, take an EA which trades a given system and has some very good years but then some years kill the account. Now, the trick is to modify the settings of this EA and run 20 or more live accounts, each one with a different setting. After a year, almost all of them will have wiped the account but a few may have produced a lot of profit. Of course, the loses of all the accounts far exceed the profits but the EA seller now has a live result of an EA which did produce a very big profit in live verifiable testing. The buyer sees what seems to be transparent testing of an EA for a year when in reality all that there was was a very broad sample test which gave some profitable results on some of the settings.

The buyer gets the EA only to discover that it fails bluntly in live testing as time progresses because the EA has this characteristic, it is only short term profitable. Now the EA seller has many thousands of dollars in sales and can move on to the next EA. Maybe the seller can just take another set of profitable settings and show it on another web site or repeat the process with another system. The cost of doing this is high, but it may only be 10-20 thousand dollars and the EA seller will end up making a lot more with such evidence at his/her mercy.

Do we have any defense ? Sure, as I have always said, back/live testing consistency and a backtest of a 10 year period of time is going to put us on the safe side. It is always very important for you to assume that EA sellers are using whatever tactics to fool you to believe results which are not true. It is always important for you to check all the important points necessary for an EA to be long term profitable. Making up all these points is almost impossible since they require true consistency with long term simulations an dynamic adaptability against changing market conditions.

If you would like to learn more about my criteria for EA evaluation and how you can start now to trade profitable trading systems with realistic profit/risk targets 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 !

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