When I started this blog, I never thought anyone would ever ask me about automated trading, but I surprisingly get more than enough emails for me to even think of writing this article.

We’ve all been tempted….you go on the one-page advertisement site with the big red letters boasting millions in profits, see the fluke, one time sample statements and the pictures of yachts and big houses and say “gee whiz…I should have that…and all I need to do is pay this guy 100 bucks for his system and its mine, right?” Yeah of course it is. Because life is really that simple. (<——-sarcasm here). One of my goals for this blog is to break my readers away from the millions of claims in false advertising that floods this business, and get them down to reality in terms of what matters most in trading. I have a renewed interest in automated systems lately, mainly because I’ve been looking to diversify into other strategies. There’s nothing wrong with it if it’s done properly, like anything else. The problem is that the retail crowd is exposed to VERY IMPROPER uses of automated trading, and it bothers me to no end. If you have ever been fed up with day trading in general and have ever had the slightest inclination to engage in some form of automated trading, please listen to what I have to say. The main reason we go into this business is to make money, and if there’s an easy way to do it, then we’re going to try to exploit it as best as possible. I get hammered with emails from too many people about making millions in this business, and according to these emails, it’s as easy as ‘clicking a mouse’. Well they’re right about that, but they’re not mentioning the other 99% of labor involved that comes before taking this action. As I’ve said plenty of times before, the retail crowd is immediately at a huge disadvantage mainly because new traders are exposed to this kind of false claims and advertising, and they get (very easily) roped into thinking that they’ll make millions right off the bat. Anyone that has been trading for an extended period of time knows this isn’t true, but try to tell this to someone in their third or fifth month into trading. It’s not easy to convince them otherwise. So what about automated trading? If it’s so easy, then why aren’t these systems making people the millions they claim? Because they don’t work as advertised. Plain and simple. But you didn’t need me to tell you that.

What We Learn from Automated Systems – Relating it to Our Day Trading

I love it when somebody tries to sell me their system, because it means I get to play devil’s advocate. All over the internet people accept trading systems as ‘valid’ or okay because they seem to be coming from a credible source that seems to know more about the market than they do. But then they lose money. Surprise surprise. Everyone hop aboard the idiot train.

Here’s a GREAT QUESTION: If a trading system works so well and was so easy to use: (for example, 3 indicators tell you to do something, so you put a stop loss at xx and a take profit at xx and it works out), then why can’t these just get programmed and do it automatically for you?

Answer: they CAN get programmed and they DO get programmed, but they LOSE money over time, because the trading system is fundamentally flawed.

Why? Because PEOPLE move markets, NOT MACHINES. If a computer could conclude that a massive selling campaign is going on because a Fed Official made a comment about interest rates, then GIVE ME THAT SYSTEM. But it doesn’t exist.

Institutional Versus Retail Automated Trading

One of the wealthiest hedge funds on the planet is run by a man named Jim Simons, called Renaissance Technology, and they’re based here in New York City and in Long Island. Renaissance separates itself from the pack because they engage primarily in automated trading, and returns have never been known to suffer. People joke because they say that walking around Renaissance is like walking around a quant-physics laboratory filled with PhD’s, because these guys are fierce number crunchers. I never worked for Renaissance, but I worked for a fund comparable in size that did engage in automated trading, and I can say this much about the systems that were used:

They are quantitative strategies because they exploit opportunities in the market without any qualitative judgment (unless they start to really lose, of course). For equity driven systems, pretty much all of them used one form or another of off-pricing exploitation, such as various arbitrage / black schools strategies, etc. For the FX systems, some of them used one form or another of fundamental analysis, taking into account interest rates, or whatever other form of economic data was seen relevant or at hand to success, but not all.

But in terms of many of the systems, a lot was purely based on price action and technical analysis, using things like relative strength, etc, in order to make judgments or forecast future price movements. If you read the book Market Wizards, you’ll find some of the industry’s top traders trading in much of the same manner as you or I. Few differences can be found here.

So the ultimate question is this: are many of these systems that get offered to the retail crowd all that much different in terms of general strategy than some of the ones used by major institutions? Surprisingly no, they’re not (yes I’m serious).

What separates them is QUALITY and the experience levels of the programmers / traders / developers that create them as well as the amount of work that goes into maintaining them. Many systems offered to the retail crowd are cranked out on a steady basis, making millions for the creators, taking millions (and then some, if including losses in trading accounts) from the users / customers.

The other big thing that separates them is RISK. Institutional investors or hedge funds are thrilled by the idea of getting a 30% return every year. An uneducated retail investor looks at that number and gawks, because they’re too jaded by the false advertising that has bitten them in the face over and over again in the short time they have been exposed to this market. They’re expecting that goal to get hit in a matter of weeks (I begin to laugh), which is a common but completely distorted understanding of the market.

In a nutshell, the ‘concept’ is all wrong from the beginning, when it comes to systems readily available to the retail crowd. My former hedge fund coworker was promoted to a position at one of our quant funds. His job? To continuously optimize and maintain the system with a team of other analysts. Contrast this to any automated trading system available to the retail crowd, and you’ll immediately see a difference in both care and logistics.

Granted, comparing a system trading over $500 million in capital versus a system trading your $10,000 brokerage account seems like a far cry, but conceptually, the goal is the same: to make money trading. How this gets accomplished is where these systems vary so much.

So getting down to reality, if you think automated trading is going to take your 1,000 account and blow it into 1,000,000 within a year, think again. None of them will.

If you have a system that you are convinced does otherwise or proves me wrong, send me live, auditable proof, and I’ll write a public apology and note your system for the books to all of my readers. But I doubt this is going to happen.

I bought FAP Turbo – Read Before You Judge:

That’s right, I said it, I bought this thing and made the author even wealthier than he already is (until my refund was processed). I was curious and needed some fuel for this article; what can I say? Right on the blog, quoting from a public chat, the author of the system recommends for ‘aggressive’ settings xx, xx and xx to be input as certain parameters.

So dum deed dum – As usual, I start with risk, and asked myself: how much am I risking at these settings? The answer: 75% or more of my ENTIRE account in a single day. WHAT THE…????!!!!!! Anger boiled over me for the creator of FAP Turbo, for making this world dumber than it needs to be.

Let me make this clear: using a setting like this is like jumping off a cliff, and it reinforces the lack of knowledge out there. They have a subscription list that consists of about 25k people or more, and this kind of knowledge is being passed along to every one of them. It’s no wonder so many people lose money in this business.

I’m not saying the system isn’t profitable, but I'm not endorsing it either. In backtests at ‘reasonable’ risk settings, it did fine (though spreads are a major issue for this system so backtests were very unrealistic, something else they don’t tell you off the bat).

What bothered me is the clear show of total carelessness coming from its creator, telling his clients that its okay to use settings like this because it will ‘double your account every month’, without ANY acknowledgement of the possible LOSSES that could have occurred along the way. Take two of these in a row, and you just blew your entire account. This is a guy that claims credibility just because he used to work for the likes of Morgan Stanley (given his advice I assume probably in payroll) among others.

I look at it this way: an inexperienced client reads something like this, and carries it onto his or her manual day trading, and blows all of their very hard earned savings in no time. The 2nd tier consequences are horrifying, and it’s a completely unrealistic view of the market.

From My Experience

As I said earlier, I started automated trading as a means to take some of the burden off of my daytrading and I found it to be just as much, if not MORE work than daytrading alone. Making money is never easy unless you’re the son of JP Morgan. Here are the most important factors to consider with any form of automated trading:

Does the system perform well over the past 5 years with no more than 3 consecutive down months?

If the system does well in 2008, but would have blown your account in 2005, 2006 and 2007, bye bye. It’s not an adaptable system and belongs in the garbage bin.

Does the system perform well in the most recent 6 months?

Many developers can optimize systems to perform well over the past few years, but they perform horribly in recent times because market conditions change. I can’t count the number of systems I’ve looked at that boast massive returns over the past few years but have been losing consistently in recent months. This is because the parameters need to be changed to reflect recent conditions, and many times the developers don’t offer the support to do this. They want to show you a rising equity curve to get the sale, but going forward is another story.

Is the drawdown to winning % ratio worthwhile?

If a 30% annual performance cannot be achieved without drawing down the account by 7.5 – 10% or more, you’ve got a system that has the potential to blow up at any point in time.

Is the system continuously optimized?

Meaning, market conditions change all the time. If the system is not able to handle all of these different types of market environments, then does it offer the flexibility to be optimized and ‘stay on top of things’? One thing I like about neural networks is that they have the ability to just this. A neural network takes trades, price and indicators and stores a ton of data so that when a new situation arises it says: ‘okay, I’ve seen this before. Price was doing this, while the indicator was at this position and the time of day was this and the stop loss was this and the take profit was this, and it worked out, so I’ll do it again”, very generally speaking. But like anything else, the system is just a system, and will have the ability to take hits. But either way they are a lot more adaptable than many other systems out there. Software platforms like MatLab and Neuroshell have hit the market in recent years to alleviate many of the pains associated with programming these types of networks.

Is live proof available, or are you at least offering me buyer protection?

I won’t even look at a system that doesn’t have some form of live trading track record or shot at getting a full refund. Theory is great if your trying to describe space / time continuum, but not if you’re trying to sell me a trading system. I see systems that run close to $10,000 in price without any refunds or live proof available. Adios.

At the End of the Day….

If you go through the list above you just knocked out about 99% of the systems available on the market. Winning systems do exist, but it boils down to RISK, QUALITY and MAINTENANCE. As I said, my interest was renewed alone in thinking that I was taking a burden off of myself, when in fact I think it just added work. If you’re in the market, just remember, you get what you pay for most of the time. Heed my warnings and you should be fine.

And some links, if you’re in the market for one of these retail systems that cost only a few hundred a pop and usually run on Metatrader, here are some links to websites that independently test and review a bunch of them. I’m not going to recommend anything in particular to you, I myself would only put these on an account I could totally care less about, but here they are:

4XProject – They buy them, they test them on demo and real money accounts; nice guy that runs this blog; I actually chatted with him online before writing this article. He’s also got a weekly newsletter where he publishes results and adds new systems http://www.4xproject.com/

Forex-Systems-Reviews.com – popular website; I’ve spoken with this guy too; good site in general http://www.forex-systems-reviews.com/

Expert Advisors Forex – another one with live statements: http://www.expertadvisorsforex.com/

Best Forex EA – This guy is funny and has a bunch of systems posted for the taking and 4 real money accounts running http://bestforexea.com/

As usual, if you have any comments feel free to post them below.