What is a forex robot?

Are You Ready To Hand It Over?

Analysis
There are successful robots out there, but one must be aware of the pitfalls that have ensnared many.

Question: What is a forex robot?

Answer:

A forex robot is a piece of automated forex trading software that automates trading decisions. The most popular robots for retail traders are built around the Metatrader platform. These robots run on MetaTrader as "expert advisers" and they can do anything from giving you a signal to place a trade, to placing and managing the trade for you automatically.

If you have a forex strategy that is strictly mechanical and doesn't require a human in the decision-making process, you can program your forex robot to trade for you 24 hours a day.

There are many companies out there that create and sell forex robots. If you're in the market to buy one, be careful who you deal with. It's common for a company to spring up overnight and start selling an "instant riches" forex robot, including a money back guarantee, only to disappear in about 45 days or so.

The majority of made-for-purchase forex robots out there are not profitable. If you are planning on purchasing one, please do your research. It's best to be doubtful because there a great deal of curve fitting or data mining bias in the made-for-purchase offerings. 

Data-Mining Bias

Data Mining Bias is the unspoken enemy of many traders who purchase Forex Robots. Data-Mining bias is the process of 'cherry-picking' the best backtest out of hundreds or more, and presenting that best backtest of they many as the likely outcome for the purchaser of the forex robot. One of the leaders of this fight to make investors aware of Data Mining Bias is David Aronson.

 

David Aronson wrote an excellent and detailed book called Evidence-Based Technical Analysis. His argument among many good arguments is that systems or indicators that are espoused to be best performers or most accurate predictors of future performance are likely a false conclusion. Rather, the finding of the outlier is often proven by looking at one data set and not testing that indicator over multiple cycles or environment.

 

Successful Robots

There are successful robots out there, but one must be aware of the data-mining bias that is front and center of most made-for-purchase systems. I have seen many successful systems and continue to learn more. Typically, these systems maintain an edge and manage risk successfully. There are less about high win rates and more about position sizing and cutting losses quick. 

If there was an application of 'buyer-beware' it's extremely applicable in Forex Robots. The most natural question to ask when proposed to buy a system is, 'If it works so well, why is it being sold for such a discount?' Typically, altruism is not the intention, but rather sub-par systems are sold as soon as a data-mined outcome can be put together so that an uneducated buyer can purchase the code.