How do you know if something is working out the way you want it to be?
In this episode of Truth About FX, Walter digs into the enticing appeal of using automated trading robot and if you should or should not really use it. He talks about important factors that you should consider when making the decision, the problems that may arise and — if you do choose to use robots — how you should decide which one to use?
Hugh also shares his experience in using trading robots and how it turned out for him.
Download (Duration: 6:42 / 7.68 MB)
In This Episode:
00:37 – shortcuts
01:40 – crappy system
03:22 – a different point in time
04:21 – margin-called
06:10 – a discretionary trader
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter! The idea of automated trading video appeals to me. Which trading robot should I use? I know that this is a question that you and I both get quite a bit, especially with the newbie traders or maybe traders who haven’t found success yet and are looking for shortcuts. What would say to that?
Walter: I really do not want to completely shift down this idea because I know there are people out there that do this successfully. But, when people say “Which trading robot should I buy?”
To me, the answer really is it’s the one that you will just load up and let it go and you won’t mess with it. You know what I mean? I know that sounds like a flipping answer or whatever but it’s true because the problem with automated trading is that, especially if you do not know the logic behind the system. Maybe you didn’t create it, you just bought it or something so it’s like a black box.
The problem with these is that we, as humans, tend to tinker with things. We’ll go in and we’ll make it so that we go “Well, the market’s changed” or, “You know, there is so much uncertainty so I’ll turn it off now” or whatever.
These things pop up and these are reasons for us to get in there and fiddle with things are really why often does not work for us. The other reason why it does not work for you is because it’s a crap system. It’s because it is crap and they’ve sold it with the 60-day guarantee or whatever.
Here is what I would say. Real simply, two systems that you should use: one, is the one that you’re not going to tinker with, that you’re just going to put on your account and let it go. You are not going to get there, turn it on and off. You are not going to adjust it or anything like that. You’ll just going to let it go.
For most of you, that is going to mean that it is a system that you know what it is so you had a program or your friend made it or something like it. You know what is it all about. That is probably true.
The other part of this is maybe you don’t know what is it about. The system you’ve heard is really good so let’s say that you know somebody that’s traded it — I have twice in my life spoken to traders who have bought these systems. Now again, I do not go out looking for this but, twice in my life, I’ve run into traders who have bought this black box systems and made a lot of money from it.
I am not saying that they are all crap and that they are all BS and they all do not work. I do believe, however, that if they do work they also go through massive drawdowns because you’re usually set quite aggressively. What that means is you could get hook into it at the right and make money and then later on you’ll lose it all.
I would seek someone out who’s used the exact same system that you are going to buy or you are going to use or whatever and ask him what his experiences has been with it. Ask him how long he’s been trading it, ask him what he set the risk parameters to.
All of that stuff so that you get a good sense of what he’s experience has been. Now, that doesn’t mean that’ll be yours because, of course, you are trading it at a different point in time in the market.
The market may have been trending when he had it and it’s not trending when you started it or whatever. That’s not true but you don’t really know what is going to happen. The past performances is never indicative of future performances but I would just say those two things.
Either, one, that you really know and then you’ve had created yourself or someone created it for you or, someone has traded it and they can tell you about it, explain it to you. Again, 90% of that stuff out there is crap and what you’re going to find is it’s often something that looks really, really good for a short period of time.
Maybe even makes a lot of money for you for a short period of time and then later on, it’ll just completely collapse. That is almost always the case with these. It is true. The other thing is, like you might find that there’s some that’ll look really tempting because they’ll say there’s no losses or whatever.
That is probably true, like you can buy these no-loss trading robots. The problem is the system does not take a loss. It’s just your account is margin called so it’s just completely blown up because it never take a loss. See what I mean?
Still no loss, it never took a losing trade, you just kept trading and trading and trading like Martingale style until you just blow up your account. I would say, really, unless you know somebody who’s trading the system that you’re comfortable with or you created it yourself and you are willing to let it ride, just let it go. Then, you probably would want to stay away from these.
That is just my bias. What do you think? Have you used them?
Hugh: Yeah. In the beginning, I did a little case study on one of the famous robot out there and I did make money. I think, on balance, I was positive but then what I didn’t like was that they started sending out these alerts like “Change your setting to this”.
I was like “Oh, that can’t be good”. Once I started changing it, then it started to break even and it wouldn’t make money anymore so I gave it up. I’ve come from the mindset that if you didn’t make it yourself, if you didn’t know how it works, how do you know what’s going to stop working?
I totally agree with your thing about you need to be able to design, or at least know how it works before you trade it.
Walter: That is so true. That’s kind of like the… When you pick your lotto numbers, you feel like you have a better chance to winning the lotto. Makes the same principle, isn’t it? It is the same sort of thing.
If you know what your trading system, what the theory is behind that and jives with what you believe about the markets, you are just much more likely to stick with it. I agree, Hugh, it’s a fair point. If you do not know what is going on there, like you say the markets changed, you’ve got to change your settings.
That can be really disconcerting it. It makes you think “Okay, I need to get out of it”. I can totally understand that. We just feel we have this need for control. As a discretionary trader, it’s easy for me to have that because I make the decisions.
If I say I want to take a trade here, I want to move my stop loss to break even here, I’m going to get out of this losing trade here before it hits my stop loss. I feel like I am in control because I am making the decisions.
You give that up when you let a robot take over so it’s a little bit tricky. That is a great question.
Hugh: Alright. Thanks, Walter.
Walter: Okay. See you.