5 Dangers of Automated Trading and How to Avoid Them (1 pages)
between the charts
Past results guarantee future success.
Seems logical at first. This is the thought process most people have when they look at the previous track record of any expert advisor or signal
service. The logic is: they have been successful over the course of the last number of months or years, why would it change now? This is BY FAR the number one mistake made when choosing a
signal provider! People see these past results, look them over quickly, ask no questions of the signal provider or EA creator and just hand over their money to open an account assuming they will profit.
Previous results don’t mean everything. Previous results should be one of several factors used when evaluating a trading system.
Danger #2: Percentage of winning trades is the most important stat.
A lot of online trading and automated systems show these fantastic results where they win 30-40 trades in a row and
people assume that this equals huge profits. On the surface it is a good thing, but you need to dig deeper and find out what has gone into these trades to make them successful. The primary thing
you are looking for is drawdown. Drawdown is how much risk the trading system is willing to take while waiting for the market to swing in the direction of the trade. The reason this is important is
that a trader could make 30 successful trades in a row making 10 pips on each trade. He then may take 2 trades for losses of 200 pips each and wind up with a success record of over 95% but still
have losses in his account.
Forget about consecutive winning trades or percentage of winning trades. Focus on the trading system’s drawdown. If the risk management is upside down, that is a strong indication of
a system will eventually fail and lead to heavy losses.
Danger #3: If you don’t get to test-drive the system before you buy it, it’s ok.
In certain cases with trading signals or automated trading systems, the price tag can be quite expensive. If the
seller does not give you a 15-30 day trial period or some kind of money back guarantee that is a MAJOR red flag. This can cause you to be a double-loser: shelling out big dollars for an unsuccessful
trading system and losses in your trading account.
Most legitimate companies who are selling signals or systems will give you at least a 2-week demo or a money back guarantee. Be very wary of the companies who do not offer trial periods
or money back guarantees.
Danger #4: Automated trading or signal systems are just set it and forget it.
When a trader buys a system they figure all they need to do is set it up and walk away. While this technically
can be done, leaving an automated trading system unattended to let it run on its own is one of the worst things you can do. The system could blow out your account in a day or a week. In addition, a
system can malfunction if it is not setup with the right parameters or if the broker can’t support it very well. We have seen systems that were up 20% in a month and then down 40% a week after that.
Spend 5 minutes every trading day making sure your trading signal or EA is running properly. This is your hard earned money! Don’t let it out of your sight.
Danger #5: Length of trading record is not important.
When reviewing a system, you want to see at least one year of live trading so you can see how it performed in different market conditions.
Some systems start out trading very well in a ranging market but then market conditions change to a trending market and the system falls apart and you are left with an empty account. You see this a
lot with new systems and EAs that circulate in the Forex community. Signal X becomes all the rage because they made 50% in a month and everyone runs out and buys it - and then it tanks. You either
get a small gain followed by a huge loss or you are late to the party and your account goes straight down after you buy what you think is the ultimate system.
Don’t be fooled by hype or sales pitches! If a system is successful, it will work for more than a month and the creator will continue to update it to adjust for market conditions. If you see
something promising with a few months track record, keep it on your radar until it is more established.
Unfortunately, there are many more losers and scammers out there than honest, successful trading system providers - so always err on the side of caution. Do your research and
avoid the common mistakes outlined above that many people make when choosing a Forex trading system. You want to invest in systems that you feel confident in and not have to worry that at
any given moment the bottom can drop out. It’s your money!
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5 Dangers of Automated Trading and How to Avoid Them
PleAse don’t let the title mislead you; we will not be wasting time bashing automated trading. We feel it serves an important function in the Forex trading industry, especially for new traders or
those that are trying to diversify their portfolio with Forex but do not have the time to dedicate to become a day trader. However, just like trying to trade Forex on your own, it’s not just pressing
a button then setting and forgetting. Finding automated systems or signal providers has just as many pitfalls as self-directed trading. The common mistakes come in different shapes and sizes
and arise more often from delusions of grandeur rather than a lack of skills or intelligence. So, without further delay, here are the 5 most common errors made in automated Forex trading.
5 Dangers of Automated Trading and How to Avoid them© Copyright 2013 ForexEducation.com. All rights reserved. Do not distribute without expressed, written consent