If forex trading robots were as much of a sure thing as promoters of trading systems make them out to be, why would anybody work?

Foreign exchange (“forex”) trading robots automatically place trades on your behalf using a complex formula.

These robots are typically marketed with impressive-looking performance records. However, those records are typically derived by “back-testing” the program against past data. In other words, the promoters go back through old trading records and see what would have worked in the past.

Automated systems like forex trading robots are configured to make trading decisions for you, but can only do two laborious yet simple things. First, they narrow down the data that you use to make investment decisions. Second, they then apply some fixed rule or rules to draw a conclusion or an investment decision from that selection of data.

The trouble is that the market’s key concerns continually change. Today’s hot buttons can turn into tomorrow’s dead ends. The past is a poor predictor of the future.

A standard marketing claim for some of these forex trading robots reads like this: “Well, simple and to the point: if you back-tested our forex trading robots, it shows 100% ‘demo’ profit in one month, it should PRODUCE around 80-100% profit in LIVE trading. That’s it … no more and no less!”

These systems often seem to work for a time, but that’s usually coincidental. If the market is going up and they tell you to buy volatile investments, then they automatically generate profitable trades. Then they quit working, and begin pumping out unprofitable trades. Often this happens just when they can do the most damage to their users.

Understanding forex investments

The type of investments forex trading robots are programmed for involve dealing in foreign currency futures or options. This can make sense for an operating business or individuals that are forced to take on currency risk—say a farmer or an import/export firm. Futures or options let the businesses or others pass that risk on to speculators who wish to accept it.

But for forex speculators, here’s how things typically work out: Suppose an investor starts out with the intention of losing no more than, say, $15,000. After a few months of trading on futures in foreign-exchange investments, the investor will typically have broken even on his futures trading—if you ignore commissions. But if you count commissions, which obviously have to be paid, the investor will have lost about $15,000.

In other words, the futures trades on forex investments work out like bets on a series of random events, such as coin tosses. You’ll win a few and you’ll lose a few, but you won’t win enough to pay your commissions, let alone leave yourself with a profit. If you’re using a forex trading robot this analysis is done automatically for you. It’s even scarier to think that forex trading robots can be setup to buy and sell automatically! In forex, options and futures trading, commission fees will be very high and eat into your profits.

Futures and options on forex investments or anything else offer a great deal of leverage. If you could get that leverage to consistently work for you, you would earn 50% to 100% or more a year on your initial stake. These days, we see lots of ads for books, seminars and software that purport to show how you can make that kind of return on a consistent basis. Some even go so far as to say you can do it in a few minutes a day. Forex trading robots are also marketed as sure things and completely automate the process.

A simple way to understand the pitfalls of forex investments

The investing business is among the world’s most profitable, so it attracts some of the world’s smartest people. Many of these people spend years studying markets at the world’s highest-rated, most-expensive universities. Many go on to get rich, but it takes decades.

Do you really think these people would go to all that trouble and expense if all they really needed was a two-day course in forex investments or to use forex trading robots?

For that matter, banks and other financial institutions spend untold billions every year to hire market experts to create and sell investment products and so on. Why would they do so if it was so easy to make money “trading forex”?

It all comes down to a basic rule of the universe: if trading was as easy as promoters of trading systems make it out to be, why would anybody work?

Have you ever used forex trading robots? Care to share your experience? Let us know how you fared in the comment section.