Killer Trading Robots (and how to avoid being their next victim)

I sometimes like to turn trading robots loose in a demo account, just to see how fast they can burn up $50,000. As it turns out, pretty darn fast. :)

trading robots

Trading robots, or EAs (expert advisors), are touted as the Holy Grail of trading. You just turn one on in your account, and it makes you a millionaire – you don’t even have to watch it!

Yeah, well, here’s the thing…If it were that easy, we’d all already be millionaires.

Trading robots are everywhere. I get at least one email a day advertising one, assuring me that it wins “95% of the time!” I’d guess that at least half of the forex trading strategies advertised for sale are robots or expert advisors.

There’s just one small – very, very small – just one teeny-tiny problem: They don’t work.

Oh, some of the better ones work for awhile. They may even work very well for awhile. But inevitably, they stop working. Worse yet, they don’t just stop making money; they start losing money, hand over fist. Before you know it…”Wow, that thing burnt up the whole $50,000 in my demo account!”

Okay, but WHY don’t they work? That’s easy enough to lay out for you. Here you go:

1 – Changing market conditions. The conditions in the forex market, the characteristics of the market flow, are in a constant state of flux, change. For example, in the past month we’ve had ridiculously small daily trading ranges. Yesterday, the total trading range for Eur/Usd wasn’t even 40 pips! That’s a massive shift from the norm, which is trading ranges of about 80-100 pips a day. The market changes month to month as well – like, December is a notoriously slow month, whereas January is extremely busy. All of these trading robots are designed to operate with certain basic parameters – like the average daily trading range – and when those parameters significantly shift, then it throws off the robot’s calculations, projections, targets, everything. Each shift in the dynamics of the market impairs the robot’s ability to perform.

When someone is trying to sell you one of these mindless robot traders, and they’re showing you its outstanding past performance, that stellar performance is over a period of time that the robot has been optimized for. That is, the various parameters, adjustable inputs, etc., have been adjusted so as to maximize performance within those specific market conditions. But when you buy the robot, market conditions have changed again and – big surprise – it doesn’t work like that amazing “past performance”.

A few robot sellers will at least be honest enough to tell you that there are half a dozen or more “input parameters” that need to be constantly adjusted in order to keep up with ever-changing market conditions. Unfortunately of course they can’t tell you exactly WHAT adjustments to make, or exactly when to make them, or how in the world you’re even supposed to figure all that out.

2 – Disastrous money management. Here’s the pitch – “Only 4 losing trades in 3 months!” And here’s the reality – if you look closely at all the data in those past performance records, you might notice the fine print that shows “Average winning trade = $20”, “Average losing trade = $2,000”. Even at their best, most of these robots will still kill your account, because their losses are HUGE – much too large to bear, much less overcome. What happens if the first trade you open with your new trading robot turns out to be one of those $2,000 losses? Even assuming you’re not completely wiped out, it’s going to take you 100 winning trades in a row just to fight your way back to breakeven. (And if you happen to manage that – without first encountering another $2,000 loss! – how are you going to feel about having 100 winning trades in a row, and all you’ve got to show for it is the same amount of money that you started out with?)

money management

Another money management kill factor inherent in a lot of these trading robots is that they use some form of martingale betting strategy. If you’re not familiar with martingale systems, they’re a “double your bet” strategy – that is, after a losing bet, you double the amount of your bet. If you lose again, you double your bet again. You keep doing that until you win, and then return to your original bet. Well, as attractive as the martingale may sound (eventually, yeah, you WILL win a bet), the inherent flaw in it is that you need an unlimited supply of funds. If you don’t have that, then at some point you will simply run out of money to play with before you get to that elusive win which would have set you right again.

For example, if you start off with just a $5 wager, 17 losses in a row would get you to the point where your next wager would have to be a whopping $327,680! To put it in forex trading terms, if you started off trading 10 micro lots, putting up $20 in margin money (that’s with 500:1 leverage), if you had 9 losses in a row, you’d be down over $10,000, and needing to put up over $20,000 in margin money in order to make the next trade! – Lose that trade and now you’re out $30,000 and need to pony up another $40,000 to keep going. It’s simply not workable.

3 – Robots can’t feel. Herein lies the ultimate fatal flaw in robot trading. In my recent “psychology of trading” article, I noted a common characteristic among winning traders is that they have all honed their intuition and developed a feel for the market. They can sense markets shifting before price actually reflects the shift. And their feel for the market is an important component of their overall trading edge. Robots, alas, will never have a “feel” for the market. Robots can only calculate numbers – they can’t process “the big picture”.

A robot can see that Aud/Usd is down 80 pips on the day and threatening to take out a major support level just a little lower – but they can’t see that (A) the market has already tried, and failed, four times to take out that support, (B) that Eur/Usd and Gbp/Usd, both of which were also down big on the day, have started to move back up, or (C) that there’s a data release due out in about five minutes that is likely to be bad news for Usd across the board. And therefore, they can’t “see” that the smart money play is to either close out your short position, or perhaps even turn around and buy long.

Trading robots are just like other robots – they can be helpful tools, but only when directed by a person. An expert advisor may possibly provide you some advice to consider, but you have to make the final trading decisions. The best traders are actual people – not robots. And the secret to trading success is having a simple trading strategy that gives you some kind of edge (like the Double Trend Trap), and honing your skills as a master trader. I’ll be happy to help you with that any way I can, but, sorry, I don’t have any robots I want to sell you.

Jump in and comment below! – I like hearing from you. If you don’t say anything, I start thinking maybe I’m the only person in here…and then I get scared when it starts getting dark.

Peace of Christ, best wishes in everything,

Jack Maverick

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Jack Maverick Maverick

Jack Maverick is a writer and active forex trader. A former futures broker, he is the creator of the 3 Parrots trading strategy, and director of the "Forex Million Dollar Journey". He is also the author of the psychological thriller, "A Cross of Hearts". (And he's very cute, too.) He currently resides in Winston-Salem, NC.
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  • http://onlineroboticstocktrader.com/ allenrodger

    And some Remains committed to the Convention on Conventional Weapons

  • Ramon Leon

    You’d be better off thinking of them less as robots and more as automation of your style of trading. If you were a programmer, I guarantee you’d immediately automate much of your trading routine because when you’re a programmer you realize just how mechanical what you do is. Robots aren’t evil, they don’t think, they’re simply instructions some human wrote that duplicate the process that human does. Every robot is merely a duplication of its inventor thought process.

    The way you set stops is mechanical, a robot can do it equally as well as you. The way good traders trade is mechanical, they have a system; robots are merely that system written down in executable form.

    People who claim to have a feel for the market are simply people who don’t have a system and rather than admit it, they claim intuition. They’re basically full of shit; they had to look at a chart to make that intuitive decision so whether they know it or not, they’re using rules that could be encoded into a EA they’re just not smart enough to know what rules they’re following.

  • http://jbmaverick.wordpress.com/ Jack Maverick

    “your notion of what bots can or can’t do is so far off it’s stunning”
    If you read my scribbles regularly, it’s doubtful that you’d ever be STUNNED, or even mildly surprised, by my ignorance. I know I never am. :)
    “Unless you’re a computer programmer, which you’re clearly not, you should refrain from commenting about the capabilities of software.”
    That’s probably quite true.
    Still, I’ve just read enough science fiction to know that robots don’t usually turn out to be your friends. :)
    Thanks for your comments – always good to have another point of view.

  • Rod Harrell

    IN designing nearly 5,000 MT Angiebot Strategies (4,800+) IN 39 Custom Time Frames from M1 to Y5, I found that multi-strategy MTF Systems are best utilized in an adaptive manner so that an individual strategy is only active in a given time frame when its Real-Time immediate history (Shadow Parallel Server) shows a greater than an author definable percent rate of accuracy, ie. (>80%, >85%, >90%, >95%), .etc, and/or <2, <3, <4, <5 consecutive Losses, or a 3 Losses out of 5 trades, or any author definable combination definition, etc. This way you arrive at Adaptive Swarming Technology Algos, and the Right Strategy for the Right Market conditions in any given Time-Frame will magically appear in Real-Time, and YES, it does take thousands of Strategy Options to evolve through any and all market conditions that will appear in all Tradeable Instruments over the long hall, (10 years plus). A strategy that doesn't work with extraordinary accuracy in any given Instrument today, may indeed work with extraordinary accuracy 6 months, 1 or 2 years from now, and Vice-Versa. All active as well as inactive strategies continue running on "Shadow Parallel Server" so that when any given strategy (non-active)
    in any given Time Frame in the defined portfolio of Instruments achieves the defined rate of accuracy is automatically activated on the Real Server in Real-Time…

    The previous comment references what I was designing in 2007-2008…

    RSI2 Measurement of the MTF_OBV (Multi-Time-Frame_On Balance Volume) will FILTER OUT Size Of Order Market (IMPACT) issues that are not experienced in the "Shadow Parallel Server" which is not applying capital to the Signals…

    (Yesterday, the total trading range for Eur/Usd wasn’t even 40 pips! That’s a massive shift from the norm, which is trading ranges of about 80-100 pips a day.)

    In 2006-2007, I developed a Custom Indicator Current 1-24 COMBO ATR%,

    (C1-24CATR%-09_D1.mq4) Rod's Automation Rule: "If EUR/USD Daily_ATR <0.0069 Pips [=] No Trade/Block Signal, This Rule eliminated 70% of Losses/Stop-outs in EUR/USD. There is a minimum number of pips of Daily_ATR required to achieve extraordinary rates of accuracy in all fx instruments, each instrument has it's own unique minimum number of pips requirement. It's a Volatility Efficiency Filter. This is what separates "Continuously Successful Robots" from the "One Trick Ponies"…

  • Ramon Leon

    When you write them yourself, they’re your best friends. You ideas about bots are way off because you’ve seen bad ones and they’re black boxes to you. That doesn’t mean bots are bad, it means bots are for programmers who understand them and can tweak them to suite their own trading style.

  • Ramon Leon

    > (A) the market has already tried, and failed, four times to take out
    that support

    Yes they can.

    > (B) that Eur/Usd and Gbp/Usd, both of which were also down
    big on the day, have started to move back up

    Yes they can.

    > or (C) that there’s a
    data release due out in about five minutes that is likely to be bad news
    for Usd across the board.

    Yes they can; it’s called sentiment analysis.

    It’s clear from the article you’re not a programmer; your notion of what bots can or can’t do is so far off it’s stunning. Anything you can get from a chart, so can the bot. Bots see the same support/resistance, price action, and price history you do and most certainly can do all of those things you said they couldn’t.

    Unless you’re a computer programmer, which you’re clearly not, you should refrain from commenting about the capabilities of software.

  • http://jbmaverick.wordpress.com/ Jack Maverick

    I’ve heard of that one! So sorry you had that experience, but you’re certainly not alone in that. Thanks for sharing it.
    Bottom line – Make your own trading decisions. Don’t let a robot do it – they’re not really your friends.

  • http://jbmaverick.wordpress.com/ Jack Maverick

    Thanks for your input, Ryan, and for your kind words.
    Look, all I know is I’m pretty sure that all of us working together are smarter than a robot.

  • Ryan

    They are so appealing in the fact that they “can take the emotion out” , but for the reasons you stated I have not found one to be profitable over the long run and if it by some miracle one does exists it certainly isn’t going to be for sale. I have also found that the back testing often is not accurate because of “repainted”. Anyway thanks for your articles have enjoyed them and believe I’ve learned a thing or two.

  • Dave Hanna

    Excellent analysis, Jack. I concur with everything you say, and that’s based on experience – unfortunately, not on a demo account but with real money. A few years ago, I got a pitch for a robot called “Tom’s EA”. I tried it on a demo account for a few weeks, and the performance was so good that I said “I’ve losing money by not trading this on a live account. Six months later, my live account had almost doubled, although some of that was due to additional deposits. And then the Greek debt crisis clobbered the Euro. I literally went out to dinner one evening and came home to find my account down $10,000, due to hitting a margin call. It ended up wiping out well over half my account because it couldn’t handle the changing market conditions.