A guest post on forex trading robots by a forex broker!
‘TradeProofer Guy’ approached me with the offer of a series of posts related to general forex topics, written from the point of view of an honest broker.
We agreed that the first post would be around the question of “Do trading robots really make a profit?”
I believe that TradeProofer Guy is the “real deal”. I also believe he would be open to suggestion as to topics to be covered in future. So, if you ever had a question you wanted to ask a forex broker you believed you could trust, now is the time. Please leave your feedback in the comments section at the bottom of the page…
– the author of this article is the founder of the TradeProofer self-defense community for forex traders and beside this works full time for a brokerage firm as head of online trading.
Forex MythBusters – Do Trading Robots Really Make a Profit?
To start with the conclusion: yes they do, but not for you (usually).
One of my most hated tasks as head of online trading is to meet with people trying to sell their trading robots to me and my clients.
The pitch follows the same line all the time; I guess there must be a recipe on the internet they all use. If there is such, it must go something like:
- Begin with a Personal Intro on how cool and experienced you are (look very experienced).
- Continue with buzzword-blabla on how the robot works (don’t be too detailed, it’s a secret)
- Produce an impressive performance chart (make sure you have some minor draw-downs just to make the story more credible)
- Show some user testimonies, user numbers, ongoing regulatory process to get licensed, anything that builds reputation. (you can always figure out something)
- Demonstrate the volume your robot generates and the broker’s expected share from it (name this slide in the presentation, “Partnership” or “Ways of Co-operation” or somesuch)
The first 4 topics are usually covered in 5 minutes and the rest of the talk centers on the 5th element: Volume* Yes, that’s right, the guys usually deal with expected client Profit/Loss in one or two brief sentences (if they mention it at all), but they have very detailed insights on how much volume their robot can generate.
It took me some time to realize, they just don’t want to make profit for clients. It’s not as if they were evil, it’s just:
The client’s profit does not figure in their calculations at all!
If you were in their shoes, you would understand it instantly. The thing is, it’s damn hard to make a profit in the markets. On the other hand, it’s pretty easy to push the buy and the sell button all day long.
So the tempting option for all trade robot developers is to develop a robot that is somewhat profitable (and you can always swap buy and sell signals in case you couldn’t hit it the first time) and optimize it to make as many trades as possible without harming the client P/L too much.
Yes, you read it right: client P/L is just a secondary consideration, not the target value to be maximized. I have personally heard such sentences as:
if you are not satisfied with this trading volume, we can surely tune it up to like 4x with acceptable losses on client P/L
We aimed to develop a high-frequency (trading) robot with an X% client P/L threshold
– ie. they tuned trading frequency up until client P/L got as low as X%. In other words, squeeze as many trades as possible out of the client’s account, up to the point just short of where they say “enough of this, the robot doesn’t make enough profit to justify the outlays”.
To sum it up, I don’t rule out there are honest robot developers with only client P/L in their mind, but – maybe my fault – I have rarely met any. One thing is sure: it’s way easier to earn money on trading volume (as a robot vendor/broker) than on trading profit (as a trader).
– TradeProofer Guy (the author is the founder of the TradeProofer community and works full time for a brokerage firm as head of online trading.)
* in my case, the 5th element takes no more than 2 minutes as I never cooperate with such guys.