Not many forex beginners will ascend and remain on the top of the Darwinist trading ladder and garner consistent profits. More often than not the traders find themselves nurturing a depleted account and a sense of disorientation. Statistics tell us the cold hard truth that many losers fill the pots of a few winners. Many of forex traders will try automated systems. Unfortunately most don't seem to work and of the ones that do, they usually function well for a while and then fail.
There are hundreds of automated systems yet, there are only dozens that can generate a consistent profit and we are not talking about those magical robots sold for 50 dollars by forex scam websites. Many of the automated forex systems have been developed by reputable teams of statisticians, mathematicians, forex experts and programmers.
Some of such systems have been developed by individual traders with programming skills. Backtested the system show hypothetical performance reports of 80% winning trades or better and mammoth profits. Most of the time however, when you test the system with real money, you lose and lose fast. And this is with all those explosive advances in information technology, artificial intelligence, market data mining. The computers can win chess games by generating and evaluating millions of board positions per second. They can predict the weather for three of more days ahead and they can not predict movements of the markets for the next couple of minutes. These couple of minutes is what we need to become millionaire. How is that possible? Although this article does not consider this complex question in its entirety, we will discuss a few observable facts which are often not taken into accounts by forex robots.
First of all, the actuality is that forex is nothing else than supply and demand at work. Humans are reacting to the continuing supply/demand relationships within a given market. This eventually drives price. Opportunity appears when this simple system is out of balance. Therefore, if we treat forex for what it really is, and look at it from the perspective of that supply/demand relationship. Market speculators who understand this simple equation derive their income from market speculators who don't. Imagine now that the entire market is driven by forex robots. The equation remains the same, those who "know" get paid from those who "don't know".
Therefore, if we want a consistently profitable forex robot there should be another robot on the other side of the trades which is a consistent loser. In other words our system must be an expert at finding trader who are losing. We don't need to know whether it is a human or robot run by that human on the other side, we just need to know if they it is "a time and again" profitable trader or a consistent loser.
When it comes to charting and technical analysis, most active traders use indicators. Many people criticize indicators, however they are actually a great tool if used for automated or semi–automated trading systems. The problem is that many traders take every buy and sell signal the indicator produces. These traders are likely to get their accounts depleted very fast. It is not that the indicators are doing anything wrong. They will always do what they are programmed to do. The key for the trader is to use them in conjunction with proper trend analysis. One of the great benefits to using indicators and oscillators the right way is that they allow you to trade based on a mechanical set of rules. Let's use a single moving average and stochastic in our attempt to use indicators in our system to find the consistent losing trader to trade with. Below is a chart of the QQQQ.
A moving average and a slow stochastic oscillator are being used as indicators. The slope of the moving average is up suggestive of an uptrend. The mechanical signal to buy comes when the stochastic generates a buy signal in over sold territory (circled above). It really smells like a nice low risk buying chance. However, look at the price action prior to this opportunity. During the uptrend, the stochastic was very overbought, generating sell signals during much of the uptrend which would have led to many losses had you sold short at those times. This is clearly a trap for robots as well as for new or even advanced forex traders.
Therefore, when prices are moving higher, we look for a buying opportunity when things are on sale. Moreover, our buy signal clearly tells us that someone is selling on the an uptrend. This is an a novice seller or an underdeveloped robot (we do not care). A consistently profitable trader sells in the context of an uptrend.
The next chart displays a moving average and a slow stochastic oscillator. This time is a trend is down. Therefore, we wish to find a trader who is buying in the context of a down trend. The signal comes when the stochastic produces a sell signal in the over bought segment.
Therefore, when the trend is down, look for an opportunity when prices are high. We want to sell short to the buyer who believes in mechanical indicators and buys in the context of a downtrend.Is the idea perfect? Of course not. There is no perfect trading system and there is no super trading robot. If there was, the robot would have won all the worlds' money. Remember that even casinos do not win all the time. But they will do well as long they remember they don't have to always win. Can you program the forex robot to implement this? The answer is yes. Yet there always be another someone trading against you and knowing the same trick. Many traders that will eventually go down are now spending all their time to fit and backtest their indicators and oscillators. Some of them will program them and create forex robots who will empty their accounts. A very few people will develop strategies based on the simple logic, understanding dynamics of the market and the psychology of the forex trading. However, the reality is a money transfer from those who don't recognize market logic into the accounts of those who do. Trading robots just accelerate the transfer.
The novice trader thinks that they can program a trading system by adding a few indicators and oscillators to a price chart and backtest it and let the computer do the rest. Typically, the beginner trading real money using his secret magic robot begins losing money. Next she/he begins adjusting indicator settings and worse yet, add more indicators. This is a path that leads to a calculated disaster yet the beginner does not even know it. "How can a system with such great back tested numbers not work"? The answer is that the curves can be fitted to anything but the reality of the real forex markets work is ignored. Therefore, your trading robot must understand how and why price moves in any and all markets.
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