subject: Shocking Truths About Forex Robot Back And Forward Tests [print this page] You must have heard again and again by now that forex trading is no more difficult. Just buy a forex robot, install it on your Meta Trader Platform and boom. It will start trading for you on autopilot making money while you sleep. Now can a $200 robot make you rich overnight? Definately not! If this would have been the case, all the hedge funds and big banks would have been using these robots to make huge mountains of cash for their clients. Hedge funds and big banks do use trading softwares. But most develop their own proprietary trading softwares that are highly expensive to develop and out of reach of retail traders. Retail traders have to make do with these cheap robots that are available in the market. When you take a look at the website of any robot, you feel like you are missing a golden money making opportunity by not buying that robot. Most of these website have screenshots that are nothing more than marketing gimmicks. These screenshots are meant to entice novices who don't know much about the reality of trading and are meant to make them believe that making money with the robot is very easy. Always remember, their is no Holy Grail in trading.
Most of these websites have been designed solely for the purpose of marketing and selling that robot. Almost all these websites talk about Back Test Results. Let's discuss what these back test results mean.
First what is a back test? Back test is done using historical data on a particular currency pair. Back test is usually done to see the performance of an automated system under the past market conditions. So when you see a robot website, you will read how much it could have made in the last five or ten years. Suppose, you have historical data for the currency pair GBPUSD for the last six months. You perform a back test to check the performance of a robot with that historical data.
Now a good back test can only be an indication that this robot can work. It doesn't mean that it will as a back test simply ignores spreads and slippage. For example, the spread maybe 2 pips during the day but it might widen to 5 pips in the night.
It all depends on the liquidity in the market. At the time of news release, spreads can widen as much as 20 pips. So what's use a back test is when it simply ignores these important factors that are present in live trading. Some robots cannot be back tested. This is another limitation.
Now, most of the time you will be told that you can test that robot on your demo account. Demo account testing is also known as Forward Testing. But here again there are limitations as demo trading is not live trading and there are many differences between the two.
Demo accounts have a totally different behavior as compared to live accounts. Many traders come to know this after doing live trading as the results they got on the demo account were totally different than they got on live trading. What can be the reason? When you place a buy or sell order, the broker will find a party that will take an opposite position. This is also called offsetting.
This is done automatically through the broker's trading server. Now this is not instantaneouly. It can take sometime. In some cases, it is impossible to find someone to take the opposite position to your buy or sell order. So what is possible on a demo account may not be possible on a live account. So what gets executed on a demo account maynot get executed on a live account. The only test of a forex robot is live trading.
