I think that it is incredible that several years after the beginning of automated trading systems (meaning metatrader 4 commercial systems) and the large number of promises of wealth and richness made I know no one who has been able to make a living from any of these automated trading systems. Because I do earn my income from automated trading (most of it) I feel that I can shine a little light into the reasons why traders have systematically failed to reach this point and why the current approach most people have to automated trading will not yield them a stable income in the long term. Within this post I am going to write the biggest 10 reasons why I think traders have failed to live from automated trading systems, even though the systems have been available for years.
Reason One. Ignorance. Put simply, most people do not know what they are doing. People try to profit from automated trading without knowing how to trade or understand the market. There is a failure to understand which trading tactics are sound and which tactics are dangerous and which systems will eventually bring accounts to wipe-outs. This is the largest reason why people fail to live from automated trading and it is the cause of many of the other reasons I will outline in the following paragraphs.
Reason Two. Excessive Risk. New traders tend to want quick riches from automated trading and this usually comes in the form of excessive risk. You will see that when people see some profitable settings on an expert advisor or they make some unrealistic dreamy calculations using compound interest they are prone to increase the risk of the trading systems used. They do this without any understanding of the trading system's inherent risk or its potential draw down, something which eventually leads to account wipe outs.
Reason Three. Lack of Confidence. This is a consequence of the first reason and it is directly tied to the fact that people want to get rich by using someone else's system without any understanding of how it works. Knowing how a system truly functions is vital for success since knowing the expert's inner mechanism allows us to know what market conditions are good and which market conditions are bad. Understanding allows us to have a real grasp of the reasons behind the profit/draw down cycles our trading system goes through, a MUST if you want to be successful in automated trading. Many people believe that understanding is an option and that they can blindly trade something which they don't understand. In the end, they will fail because they will NOT have confidence in their trading system. I have seen this far too many times.
Reason Four. Expecting a Paycheck. Many new comers to the realm of automated trading dream of replacing their current 9 to 5 job with an automated trading "cash machine". They quickly get disappointed when they realize that forex is not a risk-free enterprise and that a constant monthly income is almost impossible. There are draw down and profitable months and on most long term profitable systems the profitable months which make 50-100% of the yearly profit may be few and far between while losing months will be fairly common. Expecting a paycheck every month is not realistic, since the market is not always willing to allow you to profit. Definitely understanding the nature of trading and the nature of how profits are generated is vital for success.
Reason Five. Using Unsound Trading Tactics. This is mainly another consequence of reason one. The complete lack of understanding many people have about the market and forex trading systems makes them use unsound trading tactics which are bound to get their accounts wiped. Many people resort to systems which use tactics such as martingale or grid trading with the hopes of generating a higher return when in reality the only thing they are generating is an uncapped market exposure.
Reason Six. Lack of Risk Analysis. This reason is in line with the second and explains why so many people get their accounts wiped out. People fail to correctly analyze the risk levels of the trading systems they are using. More over, new traders usually calculate risk over invalid evidence (such as expert advisors which are NOT back/live testing consistent) and also assume that the historically maximum draw down is the worst possible case. In trading we always must assume that the worse is YET to come and we have to set our risk level accordingly. Capital preservation is one of the most important aspects of trading.
Reason Seven. Underestimating Live Execution. This is a very big point and a problem which many new traders face. This point is particularly strong for people which want to use scalping systems profitably. They often trade these systems in demo or backtest them with excellent results (note that backtesting is bound to be very unreliable due to one minute interpolation errors) and then they realize in live trading that the number of profitable trades or the profitability of most trades is greatly reduced by spread widening, re-quotes, etc.
Reason Eight. Focus on Short Term Results. It is a sad thing that most people who enter automated trading focus on short term results. This is the reason why people go through endless cycles of testing and reviewing only to find that in the end they are left with nothing. There is a very big focus on short term profitability (a few months or even less time for results) while the big focus should be on LONG term trading and profitability. Traders will get excited with a system that has been profitable for a few months only to run it and wipe their accounts in the long run. They will also dump good systems that go through normal draw down cycles due to the lack of risk analysis. It is a self-reinforcing cycle that ends with people being poorer and EA sellers being richer.
Reason Nine. Long Term Profitable Systems are VERY Hard to Trade. I have always thought that this is one of the most important reasons why people fail to live from automated trading. The truth is that all the systems I know which have long term profitability in mind are very hard to trade. They have long draw down cycles and extensive periods of consecutive loses which make new traders fail psychologically. People generally lack the understanding, knowledge and confidence to use these systems successfully and this makes them resort to strategies which are bound NOT to be long term profitable like scalping trading systems (as I have said on a few posts, the creation of a long term profitable scalping system is highly unlikely due to the variation of the nature of short term movements along different market conditions, added to the difficulty in proving long term profitability due to inherent errors in backtesting when using short TP values) , martingales and grid trading systems which will only end with their accounts being wiped out.
Reason Ten. Lack of Capital. This is another chief reason why people fail to make a living from automated trading. You will often see people wanting to go from 100 USD to a 10,000 USD per month income in just a few months. This is outright impossible. Most people fail to realize that they need large amounts of money invested to be able to live from automated trading and those who invest large amounts tend to lose them due to all the above reasons. It is important to know the capital requirements for a certain average yearly income and then have realistic profit and risk targets.
So as you see, it is not surprising that I have met no one who lives from a commercial expert advisor. It is very hard to expect anything else when you have people trading systems they do not understand, underestimating risks, using under-capitalized accounts and unsound trading tactics. However the fact is that most of these things are likely to remain that way because they appeal to the marketing area. Traders will continue to use short term profitable systems which wipe their accounts in the long run with no real understanding of their trading logic or their potential for success.
My hope with this blog is that some people will see that using a black box is not the answer and that true success in automated trading comes from hard work and understanding, not from mindleslly testing everything that comes out of the market in the hopes that something will be that "holy grail". If you would like to learn more about my views about automated trading and how I develop likely long term profitable systems (and how you can too !) please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !
Reason One. Ignorance. Put simply, most people do not know what they are doing. People try to profit from automated trading without knowing how to trade or understand the market. There is a failure to understand which trading tactics are sound and which tactics are dangerous and which systems will eventually bring accounts to wipe-outs. This is the largest reason why people fail to live from automated trading and it is the cause of many of the other reasons I will outline in the following paragraphs.
Reason Two. Excessive Risk. New traders tend to want quick riches from automated trading and this usually comes in the form of excessive risk. You will see that when people see some profitable settings on an expert advisor or they make some unrealistic dreamy calculations using compound interest they are prone to increase the risk of the trading systems used. They do this without any understanding of the trading system's inherent risk or its potential draw down, something which eventually leads to account wipe outs.
Reason Three. Lack of Confidence. This is a consequence of the first reason and it is directly tied to the fact that people want to get rich by using someone else's system without any understanding of how it works. Knowing how a system truly functions is vital for success since knowing the expert's inner mechanism allows us to know what market conditions are good and which market conditions are bad. Understanding allows us to have a real grasp of the reasons behind the profit/draw down cycles our trading system goes through, a MUST if you want to be successful in automated trading. Many people believe that understanding is an option and that they can blindly trade something which they don't understand. In the end, they will fail because they will NOT have confidence in their trading system. I have seen this far too many times.
Reason Four. Expecting a Paycheck. Many new comers to the realm of automated trading dream of replacing their current 9 to 5 job with an automated trading "cash machine". They quickly get disappointed when they realize that forex is not a risk-free enterprise and that a constant monthly income is almost impossible. There are draw down and profitable months and on most long term profitable systems the profitable months which make 50-100% of the yearly profit may be few and far between while losing months will be fairly common. Expecting a paycheck every month is not realistic, since the market is not always willing to allow you to profit. Definitely understanding the nature of trading and the nature of how profits are generated is vital for success.
Reason Five. Using Unsound Trading Tactics. This is mainly another consequence of reason one. The complete lack of understanding many people have about the market and forex trading systems makes them use unsound trading tactics which are bound to get their accounts wiped. Many people resort to systems which use tactics such as martingale or grid trading with the hopes of generating a higher return when in reality the only thing they are generating is an uncapped market exposure.
Reason Six. Lack of Risk Analysis. This reason is in line with the second and explains why so many people get their accounts wiped out. People fail to correctly analyze the risk levels of the trading systems they are using. More over, new traders usually calculate risk over invalid evidence (such as expert advisors which are NOT back/live testing consistent) and also assume that the historically maximum draw down is the worst possible case. In trading we always must assume that the worse is YET to come and we have to set our risk level accordingly. Capital preservation is one of the most important aspects of trading.
Reason Seven. Underestimating Live Execution. This is a very big point and a problem which many new traders face. This point is particularly strong for people which want to use scalping systems profitably. They often trade these systems in demo or backtest them with excellent results (note that backtesting is bound to be very unreliable due to one minute interpolation errors) and then they realize in live trading that the number of profitable trades or the profitability of most trades is greatly reduced by spread widening, re-quotes, etc.
Reason Eight. Focus on Short Term Results. It is a sad thing that most people who enter automated trading focus on short term results. This is the reason why people go through endless cycles of testing and reviewing only to find that in the end they are left with nothing. There is a very big focus on short term profitability (a few months or even less time for results) while the big focus should be on LONG term trading and profitability. Traders will get excited with a system that has been profitable for a few months only to run it and wipe their accounts in the long run. They will also dump good systems that go through normal draw down cycles due to the lack of risk analysis. It is a self-reinforcing cycle that ends with people being poorer and EA sellers being richer.
Reason Nine. Long Term Profitable Systems are VERY Hard to Trade. I have always thought that this is one of the most important reasons why people fail to live from automated trading. The truth is that all the systems I know which have long term profitability in mind are very hard to trade. They have long draw down cycles and extensive periods of consecutive loses which make new traders fail psychologically. People generally lack the understanding, knowledge and confidence to use these systems successfully and this makes them resort to strategies which are bound NOT to be long term profitable like scalping trading systems (as I have said on a few posts, the creation of a long term profitable scalping system is highly unlikely due to the variation of the nature of short term movements along different market conditions, added to the difficulty in proving long term profitability due to inherent errors in backtesting when using short TP values) , martingales and grid trading systems which will only end with their accounts being wiped out.
Reason Ten. Lack of Capital. This is another chief reason why people fail to make a living from automated trading. You will often see people wanting to go from 100 USD to a 10,000 USD per month income in just a few months. This is outright impossible. Most people fail to realize that they need large amounts of money invested to be able to live from automated trading and those who invest large amounts tend to lose them due to all the above reasons. It is important to know the capital requirements for a certain average yearly income and then have realistic profit and risk targets.
So as you see, it is not surprising that I have met no one who lives from a commercial expert advisor. It is very hard to expect anything else when you have people trading systems they do not understand, underestimating risks, using under-capitalized accounts and unsound trading tactics. However the fact is that most of these things are likely to remain that way because they appeal to the marketing area. Traders will continue to use short term profitable systems which wipe their accounts in the long run with no real understanding of their trading logic or their potential for success.
My hope with this blog is that some people will see that using a black box is not the answer and that true success in automated trading comes from hard work and understanding, not from mindleslly testing everything that comes out of the market in the hopes that something will be that "holy grail". If you would like to learn more about my views about automated trading and how I develop likely long term profitable systems (and how you can too !) please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !
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7 comments:
Hi Daniel,
I'm very impressed with the fact that you dont know (who does?) even one person living from automated systems. And the reasons you wrote for demonstrating that are very, very strong. Agreeing intirely with the first nine, the last one is, after all the key. Even if you can overcome the first nine, what can you do without capital? Dealing with long term profitable system that generate in average 10 to 30% a year (not always probably, sometimes much less) living out of automated forex means you shoud have at least 200.000 (two hundred thousand USD) in capital, in one or several account, to make between 20.000/60.000 a year. How many forex investors have 200.000USD to invest and make a living out of it? And investing 200.000USD now means one have to wait at least two years to withdraw, with some security, the first 10 ou twenty thousands USD. So, what should do people who only have 1.000 ou 10.000 to invest? Just trade for fun? Because with such small capital in no way one can have a living out of profits (at least with long term profitable systems).
Regards
Cador
Hi Cador,
Thank you for your comment :o). What you're saying is absolutely key to understand the subject. How can a person with 1000 or 10,000 USD hope to live from forex ? How can such a person invest and generate capital from this business ?
I do NOT imply that people need to trade for fun just because they lack capital ! What I mean is that people should think about forex trading as a long term investment and they should use realistic profit targets to get there.
For example, if a person starts with 2000 USD and invests 300 USD (for every draw down month)on every new equity high (as I suggested on an earlier post) then in 20 years this person will have more than 1 million USD if an equity high is reached at least once a year in average and the system produces at least an average 20% yearly return. However, within year 5 the person will already be able to withdraw a 10-20K yearly income and within 20 years a 60-120K income.
There is a lot of income power in forex trading and that power can be tapped by using sound trading strategies which generate compound returns.
Now, you also say in the end "at least with long term profitable systems", however, take into account that trading anything else will lead to account wipeouts in the long term and that is NOT a path anyone would take towards a long term investment nor a living income. Simply trading systems which risk to lose all capital through the use of unsound tactics is simply not acceptable.
Certainly people have been selled a dream of richness starting with a 500 USD investment that simply won't happen in real life. However it is true that there is a path towards wealth building and an income from forex trading which comes from saving and investing in sound trading systems with controlled risks.
Thank you very much again for your comment :o)
Best Regards,
Daniel Fernandez
Hi Daniel,
When i said "at least with long term profitable systems" I meant "at least with long term profitable systems during the first 5 or ten years".
Could you please show us a table demonstrating how in 5 years one can withdraw a 10-20K yearly income with a starting capital of 2.000 USD and investing 300 USD (for every draw down month)on every new equity high?
Thanks a lot
Hi Cador,
Thank you for your comment :o) I meant 10 years, sorry for the mistake ! Tomorrow I'll publish a post about compounding with a table showing you exactly how in 10 years you can have a 10-20K yearly income and in 20 years a 120-200K income. Thank you very much again for your comments !
Best Regards,
Daniel Fernandez
Daniel-
Don't forget the impact of taxes in your analysis - I know it varies by country. I did a post on this a few weeks back at:
http://fx-mon.blogspot.com/2010/01/megadroid-backtesting-and-1-week.html
I found that $1000 which grows at 1% a week will add up to $1,400,000over 10 years. Take away a 28% capital gains taxes at the end of each year and the sum grows to only $50,800!
That's one advantage of stocks and tax-deferred retirement accounts is that you can defer taxes to the end build up a much larger bankroll in the process.
Point is that taxes really eat away at your gains longer term.
Cheers,
http://fx-mon.blogspot.com/
Hi Txcmon,
Thanks a lot for your comment :o) You do raise an interesting point which I was also going to comment on tomorrow. However you are overestimating the effect of taxes. With a 2000 USD deposit and the 300 USD additions mentioned above you still get a 10-20K income in 10 years however the long term goals are reduced, although not so dramatically from a 100-200K income to an income around 60-100K. Tomorrow you'll see exactly what I mean.
I think you miscalculated the effect of taxes on your article since taxes are only charged according to each year's profits. This means that your effective compounding rate is diminished by 28%, meaning that for the system discussed above with a 20% average yearly profit, the profit with taxes would be 15.4% (20%-4.6% (which is 28% of 20%)).
I'll include this on tomorrow's analysis so that you can see what I mean :o) you will then see why your calculations are NOT correct. Thank you very much again for your comment Txcmon ! You always raise some very valid points :o)
Best Regards,
Daniel Fernandez
Just to be clearer I have studied your example :
1000 USD for 10 years at a 50% compound interest (as you assume on your post)
gives you 134,107 USD compounded monthly, NOT 1,400,000 USD. You seem to have made an honest mistake on your post as you do mention 144,000 USD initially but then talk about millions (?). That's ok, we all make mistakes :o).
If you take 23% taxes out, this means you get a 38.5% yearly interest which leads you to a profit of 44,000 USD so you actually get about 1/3rd of what you would get without taxes, NOT 10 or more times less as you implied.
However you will see on tomorrow's post how the money additions remove this problem to a GREAT extent and make capitalization much more efficient, even after the 23-28% (for most countries) tax cut.
Thanks again for raising this very interesting point up ! :o)
Best Regards,
Daniel
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