Because this article is good for educating new traders, I will share the same contents in this blog too.
In this article, I will try to explain the big gap between knowledge of using EAs (i.e. trading robots) and your expectation as consumer.
Typical Scenario losing money with EAs and robots
This is the typical three step scenario how novice trader starts to appointed to the signal subscription or buying EAs and etc. Then they can lose a lot of money pretty quickly with too optimistic thinking.
1. You have an idea of trading robot can beat human trader from news and mess media, etc.
2. Then you see many signal copying adverts on the internet with unrealistically high growth was achieved in backtesting and even forward testing with all sort of sweet words, etc.
3. You copied their signal or buying EAs and you never get the same results but losing money ever fast (the speed of losing money is even faster with high frequency or scalping robot because they are high frequency.)
Starters must read
1. Backtesting is never indicative of future performance
2. Profitability in Live forward testing can only result in one or very few brokers. This means that many times it will not work for you when you copied the signal.
3. Live forward testing result is not absolutely trustable source either. It is possible to easily produce good live forward testing results for 6 month or 1 year or even 2 years and they can blow up all their account in 1 day (Black swan).
4. EAs and trading robot are not updated with real world market news and economic data release. Hence, they can always go against the market for big news release.
5. EAs (i.e. Trading robots) are operating in black box mode. Hence, you have less control over their operation.
Here is why
Expert Advisor or trading robot or signal copying is a highly specialized statistical product but this is least emphasized by MetaTrader users and signal provider.
Why? Because you need to understand how the simulation technique, data and strategy contributes towards your profitability (one more factor is real world technology around internet and network).
What you are seeing in backtesting and some forward testing is typically strategy part only.
Some novice traders are missing to see how the simulatin technique and data plays a role in the profitability as well as technology around internet and network.
How these three simulation technique, data and strategy contributes towards the profitability are best described in the language of math and statistics (Not theoretical math but applied math, these two are totally different. Applied Medical statistics and applied geo statsics are often great resource and knowledge reservoir for this).
Until you fully understand all these, I will not recommend EA and trading robot.
Typically this is quite intensive learning skipped by many starters and traders.
I do understand you want to make money quickly But can we go long way short really ?
If you try to shorten the path by skipping them, eventually you will take even longer time than people taking the right path from the beginning.
What options do we have?
Your option to the profitable path in financial trading is either you become great applied statistician (i.e. mathematical trader) or great trader (i.e. manual trader knowing how to apply fundamental and technical analysis).
Question is which professional trader would choose to become ?
If you are unfamiliar with numbers and quantitative theory like mean variance, capital market line , error correction model, integrated moving average, cointegration, ADF test, Phillips–Perron test , two-way handshake, three way handshake tcp/ip, REST api, etc,
I think I will recommend to become manual trader.
Do not forget that we always have an option for not trading.
EAs and Trading robots are a highly specialized and sophisticated statistical product but they are often treated like piece of shampoo bottle sold for $99.
Before using them, user must understand how simulation technique, data, strategy and real world network contributes towards the profitability.
We will not discuss all these in this post because this is such a long story.
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