Monday, April 22, 2024

The Only Trading Bots that Actually Work

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Are you tired of losing money on trading robots that promise you profits, but never deliver? Look no further than this article, where I will share the truth about which trading bots actually work and how to find one that fits your unique personality.

Many fully automated bots fail for a variety of reasons, including over-optimization, poor instructions, and even fraud.

However, there are three types of trading bots that actually work: those you build yourself, those created by a proven trader, and those that only partially automate your trading strategy.

Keep reading to discover how to avoid the pitfalls of ineffective bots and find ones that work for you.

Note: I talk mostly about MetaTrader EAs in the video, but the same logic also applies to trading robots in crypto, futures, stocks and every other trading market.

My Personal Experience with Trading Robots

I told him it wasn’t a good idea. 

But my friend insisted that he had backtested the robots and they should work fine.

Now I don’t know how well he actually tested them, but I took his word for it.

Back in the day, my buddy put most of his retirement money into a Forex brokerage account and bought a bunch of MetaTrader EAs to trade it for him.

His logic was the bots represented diverse range trading strategies, so that would help him mitigate the drawdowns and should make money on balance.

I checked in with him a couple of months later and the robots had drained almost all of his account.

He finally threw in the towel and shut it all down.

This story has always stuck with me because it’s a perfect example of why it’s not a good idea to put any faith in third party trading robots.

Around a similar time, I also experimented with one robot.

The trouble I had with the bot was that the creators would change the “optimal” settings every couple of weeks.

From what little I knew about trading back then, I knew that there was no way that the robot could have been legit.

Settings should not change that frequently.

I did make a little money though, but I knew that it was just a matter of time before the robot blew up.

So I took my profits and never took another trade with a third party robot again.

Since those experiences, I’ve learned a lot about automated trading and what works and doesn’t work.

Here’s how trading bots can help you and what to avoid. 

Why Most Trading Bots Don’t Work

Backtesting results

First I’ll show you what to avoid.

The reality is that almost all third party trading robots simply do not work. 

Regardless of how good their marketing is, they are all doomed to fail.

Here’s why…

Over Optimization

One of the main reasons why most bots do not work is due to over optimization, sometimes called curve fitting.

Many trading robots are designed to perform very well in specific market conditions, such as trending markets.

However, they may not perform well in other market conditions, such as ranging markets.

This is because they are over-optimized and do not take into account all market conditions.

In addition, if you look carefully, you’ll notice that many bots are only backtested over a period of less than 2 years.

The reason is that it’s very easy to optimize a strategy over a very short period of time.

But creating a strategy that makes money across different types of markets is difficult.

As a result, the EA may appear extremely profitable in the short term, but will usually fail to deliver consistent profits in the long run.

Mismatch With User Personality

Another reason why most fully automated trading programs do not work is that they do not match the user’s personality.

Even if a robot is profitable, it may not be suitable for a user who is risk-averse or cannot tolerate large drawdowns.

This is because the bot may have a high-risk profile and may not match the user’s risk profile.

For example, let’s say that a robot really can make 70% per year.

But it’s also going to have 60% drawdowns to achieve that return.

Most people won’t be able to handle a 60% drawdown and will turn off the robot before it can make the money back.

Poor Instructions

Many bots come with poor instructions, which can make it difficult for users to set them up properly.

If an trading robot is not set up correctly, it may not perform as expected, and may fail to achieve the desired results.

I looked at the user instructions on the websites of several different trading robots when I was in my bot phase and almost all of them were terrible.

They didn’t explain what the settings did and why they were being changed.

None of them explained the strategy in detail.

Many websites were in broken English.

As I always say, If you don’t know a trading strategy works, how will you know when it stops working?

You don’t.

So if a bot creator cannot explain exactly how a trading robot works, and how to set it up correctly, you have zero chance of making money with it.

Potential Fraud

Unfortunately, there are bots in the market that are completely fraudulent and do not deliver the promised results.

Some of the common types of fraud include:

  • Photoshopped performance graph
  • Bsacktesting without transaction fees
  • Deposit and withdrawal tricks

The first 2 issues are self explanatory, but deposit and withdrawal trick might not be, so I’lll briefly explain that one.

What some shady bot makers do is put their bot’s example account on a public trading tracking website like MyFxBook.

When they are about to have a winning trade, they withdraw money from the account before they have a winner, so the winner is a much bigger percentage of the account.

On the other hand, if they are going to have a loss, they deposit money to the account so the loss looks much smaller than normal.

Fortunately, this is easy to spot if you look at the trades log.

Unfortunately, the other two frauds are not as easy to spot.

So that’s why it’s important to stay away from 100% automated, third party trading robots altogether.

Types of Trading Bots that Actually Work

Trading bot that actually works

However, there are instances where a bot can work.

They may not be what you think, so read the next section carefully.

Self-Built Bots

One type of successful trading robot is the one you build yourself.

This can be done by either programming it yourself or creating a manual trading strategy and then automating it later.

The probability of success is higher because you know exactly how the strategy works, it fits with your personality, and if something goes wrong, you will know it immediately.

If you want a fully automated trading strategy, this is the best way to go, in my opinion.

Mentor-Assisted Trading Robots

Another type of successful bot is one from someone who has backtested it significantly and is willing to personally mentor you on how to use it.

They should already be using the robot successfully themselves and be willing to tell you how it works.

If the mentor is not willing to tell you how the bot works, that’s a huge red flag and you should run in the opposite direction.

The mentor should also be willing to get on zoom calls with you and show you how to use it.

I like this option the least because there can still be an issue with personality matching between you and the bot.

But having a mentor there to help you and knowing how the trading program actually works are two big steps in the right direction.

Just be careful and do your homework before committing to any mentor.

Partial Automation Bots

The third and final type of successful trading robot, and my favorite, is the type that only does partial automation.

These bots can automate your entry, exit, or trade management, but not the entire strategy.

The most useful ones are those that automate your exit, as they allow you to use trailing stops and potentially capture more profits on your trades.

Partially automated robots are less complex and can save you time and make you money while you sleep.

Since they aren’t controlling all of the trading, you still have a lot of input into the success of the strategy.

For many traders, this is the happy medium between manual trading and full automation.

We have a few EAs for MetaTrader that might work for you.

It’s best to avoid fully automated trading robots, as they usually do not work due to the reasons listed above. 

Remember, if you don’t know how an off-the-shelf bot works, how do you know when it stopped working?

How to Find an Bot That Works

Trading chart

Now that you know which types of bots actually work, here’s how to find or create the best trading robot to you.

Keep in mind that this is a process, so you may have to try different avenues and do a lot of testing before you find something that works for you.

Develop a Strategy Yourself

One way to find a trading bot that works is to develop a manual trading strategy yourself.

This allows you to know how the strategy works and custom tailor it to your personality.

Once you have a successful manual strategy, it’s easy to hire a programmer that can create the bot.

Or you can learn to code yourself by looking at some examples.

The hard part is coming up with a strategy that actually works.

However, remember that not all trading strategies can be programmed into a computer.

So if that’s the case, then you’ll have to move on to the next option.

Seek Partial Automation Solutions

Another way to find a trading robot that works is to look for partial automation solutions.

These EAs only automate part of the trade, such as entry, exit, or trade management.

The best partial automation EAs are those that automate exits, as they allow you to use trailing stops and capture more profits on your trades.

It is important to note that most fully automated EAs do not work for several reasons.

Firstly, many EAs are over-optimized and only work in certain market conditions.

Secondly, EAs may not match with the trader’s personality or risk profile, leading to turning off the EA at random times.

Thirdly, some EAs come with terrible instructions, making it difficult to set up properly.

Lastly, there is straight-up fraud in the EA market, with some vendors photoshopping performance graphs or backtesting without commissions or spread.

Overall, it is best to either develop a manual strategy and automate parts of it or seek out partial automation solutions.

Building your own EA or finding a proven trader to mentor you on their EA can also be successful, but these options are rare.

When selecting an EA, always be cautious and avoid anything that seems too good to be true.

Find a Mentor

I saved this one for last because it’s actually pretty hard to do.

The ideal situation would be to work with someone that you’ve known for some time and trust.

There are just too many trading robot frauds out there to know who to trust.

So I would generally advise against going this route, unless you know for sure that a person is legit.  

Conclusion

In summary, it is important to be cautious when choosing a trading robot.

Most fully automated bots do not work for several reasons, including over-optimization, not matching with the user’s risk profile, poor instructions, and straight up fraud.

However, there are three types of EAs that have been proven to be successful.

Explore those options if automated or semi-automated trading appeals to you.

Remember to always be cautious and do your research before investing in a robot or programmer.

But by following these guidelines, you can dramtically increase your chances of having a bot that actually works.

 





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