Commander in Pips: Let’s proceed with scam disclosure and potential traps that could appear in trading. Today we will start to talk about trading bots. Later we also touch the topic of trading signals services and more about scam brokers.
Pipruit: Ok, I’m ready.
Commander in Pips: Once if you remember we already have discussed two different approaches to trading – mechanical systems and analytical ones. Today we will talk about first one, but not totally just in part related to scammers.
What is a mechanical system or as it also often called bot, robot, expert advisor and so on? This is some kind of mathematical algorithm that is based purely on technical analysis and most often on indicators’ application which suggests entry/exit conditions and some money management – placing stop losses, changing lot sizes and so on. So, call it a bot, because it generates signals and open/close positions without human participation. You may sleep, swim, watch a movie or visit your grandma – no matter, the bot will continue to trade until you will stop it, or… until the margin call on your account. Yes! This is also possible.
Commander in Pips: First, I suggest you to re-read the chapter, dedicated to comparison of analytical approach to trading and mechanical ones. Shortly speaking, there are two major problems with robots – past performance and optimization can’t guarantee success in the future. Second – robots do break sooner or later. The reason of both failures is the ceaseless market’s mutability.
Commander in Pips: The market is changing over time; it has to adapt itself so that most people always lose money, in other words market is changing own breath. Since market action is just a consequence of trend (up or down) and sideways action they could change each other with unlimited number of combinations. This market dynamic hardly could be adapted forever. So, most trading systems can’t be adapted so that they will be tuned on market dynamics at all times, so to adjust itself for changing market’s environment. This should be in this case some kind of intelligent robotics that is not the case currently. Since most programs past through an optimization process, based on historical data and there is an assumption that the market will remain unchanged. So if some bot has worked perfect on historical data – it will supposedly continue to do so in the future. In reality a really good trading bot will work for 1-2 years as a maximum. Then it will demand adjustment or even will stop to work at all.
Relatively more stable trading systems that are based on volatility breakouts can be designed, but these can fail too.
Another reason is that market could change fundamentally. For example, imagine that Japan will find huge diggings of some mineral resources. Or some central bank will change overall economy policy due political events or something. In other words, if will happen some events that drastically change the role of some currency and its value. The market will change in this case.
Pipruit: I understand the problems with robots and that they could lead to losses, but how is this part of the scam department?
Commander in Pips: Very simple. Scamming here is the way how robots are presented by their promoters. Robots and their development is not a scamming process. The problem is that even if robots are junk, many promoters will put up a good front and tell you that this is a gold mine, and you probably will not need to work any more, just let the robot bring in all the money you need. Besides, we offer you it for (right puny) $50-5000. Is it money at all? The next thought you probably will say next…
Pipruit: Wow, sir, but $50 is so cheap to get the chance. What if I get lucky and find a good one?
Commander in Pips: Yes, you’ve said that…
$50 - it is too small for the change. But be careful – do not catch lack (of money) instead of luck by taking such a robot. How do you think, is $50 much or small if it will lead you to loss of you account, say 2000K. Will you be happy if you pay “just” $50 for a $2000 loss?
Pipruit: I guess not.
Commander in Pips: Right, and now listen. The most logical question here is:
If you have a gold mine robot that generates millions of pips daily profit – will you sell it at all? What for?
Second stupid question – will you sell it for $50? Try to answer by yourself. This robot will produce some profit but only as sell revenues by scammers to pigeons. I do not know how much it will be in pips…
Pipruit: Ok, maybe this is the case with raw robots, but what about those that was back-tested?
Commander in Pips: Well, here are some chances to success. But, since we are talking about scammers, we will continue to look at this situation from this point of view:
1. Real and acceptably working trading system will not cost $50, but the problem is that:
2. If some trading system is expensive, this does not tell us that it is real and acceptably working one.
3. Back testing could be fabricated. Scammers can use any numbers that they need instead of real historical quotes to make their system show you good results. You will probably not investigate the numbers that were applied in back testing. Sometimes this will be even impossible.
Pipruit: Hm, it looks like chained circle. So, we can’t deal with robots anyway?
Commander in Pips: If you have decided in previous part to not trust your money to stranger (aka manager) why you intend to do that to some piece of iron that has no brains and does not know what it is doing?
But hold on, son. I have some recommendations that could be useful to you.
1. If you are newbie trader and do not have any solid experience understand nothing in programming and little in trading – stand away from robots and other stuff of this kind. Your primary target is to learn to trade with profit consistently;
2. If you trade consistently with profit and decide to dig a bit robot’s topic – find a good and independent programmer, if it will be your friend – all the better. Get some basic knowledge of programming, and language, understand how algorithms work. For example, to program in MT 4 you need knowledge of build-in MQL language. Examine the code of free indicators and algorithms that were written by others and so on. Read some books about development, testing and optimization of mechanical trading systems.
3. Spend some time on the work that we are doing for you with our performance tests. In fact they could be great, I mean robots, but they do break – nothing works forever, especially such fragile substances as trading program. Think about this - Why doesn't Porsche produce trading robots? I probably will buy one, at least while its warranty valid.
4. And finally – don’t put all your eggs in one basket. Set aside for robots just a small part of your assets and save the rest for your personal trading. Indeed, if those robots are really so good, then even small part assets should be sufficient to become the boss of G. Soros right?
Trading signals services
Commander in Pips: In general signals services are not much different from managing and trading bots. The major different in them is that you can decide – to take signal or not, with what volume to trade and can monitor overall development of the trade. In fact, a traditional signal service just gives you the kick – “Dude, Buy!” or “Dude, Sell!” After this you are scratching your head and trying to come to any conclusion. NOTE: Some signals services offer link to a “slave” EA that copies the trades automatically to your account.
Pipruit: And what’s wrong with it? At least I’m controlling situation and can accept or denied the signal. I’m my own master. With third part management I do not see anything – trades, decision context – nothing. With trading bots I also can’t do much, but here – all the cards in my hands, I suppose.
Commander in Pips: I tell you, there are still some scam traps here:
2. Some good traders could provide their own signal services for free, but usually they do it, if you subscribe for some another services, say trading online room or some others;
3. Take a note that when you take some signal – you absolutely do not know what the foundation of it is, what’s the context and reason for provide it, and how it has appeared at all. All choice that you have is just to take it or not. How do you know, maybe some guy tossed a coin and say – “Heads – buy, tails – sell” and have sent this signals to you. Other words, if you trade – you do it blindly. That sounds not too fascinating, right?
4. Also signal service could be based on some trading bots, that even you have seen before and denied it. But now those swindlers run the same bot in their office, get signals and send them to you. In fact, you’ve bought the same bot, but do not know about it;
5. Human beings psychology is structured so, that it notices unwelcome event stronger than good ones. For example, if you will not take received signal today but the market will accomplished it – you will feel regret about it. At the same time, if you will take 3 losing signal trades in row after that – you will forget about it as soon as will see another missed signal opportunity. This lets bad signal services exist and be demanded by lay people;
6. Here we have to give you the same advice – take a look at promotion way, remember Dennis The Menace 2. If they promise you gold mountains with just $50 monthly subscribe for first 2 weeks (to test the service) – be careful. If their signal service is so good, why do they share with it? Why they do not just use their signals for themselves?
If you want just use signals
1. Meet with our Forex Signals Reviews. At least this will let you to avoid many pure scams. You can also check the FPA's Performance Tests of many signals companies;
2. If a signals service comes from a famous trader – he will not give signals absolutely free. Probably you will have to pay for something else – books, forum access, software and get signals just as some add-on.
3. Test signals for some time on demo. Better if you will test them in different market environment – trending and ranging;
4. If signals are provided with foundation and explanation – much better. In this case you can understand why they tell you to buy or sell, and you can compare the signals with your own trading plan;
5. Using signals blindly is a dead-end track in trading – no experience, no success, no profit.
If you want to study
1. That is what we strongly recommend to you.
2. If you follow some trading technique, say, Harmonic patterns, De Mark, DiNapoli, or Elliott Waves – never mind. Find famous and successful trader with this technique and subscribe for their signal service or on-line trading room. This will let you to get access to historic researches, pass through them and get priceless experience of your technique application to real markets.
3. Use only those signal services that provide trade foundations as well. So, that you can understand why they call you to buy or to sell;
4. At the same time follow your own trading plan. Use third party business only as add-on or additional check of your analysis.
5. FPA will give you different opportunities here. First, this is daily signals by Peter O based on fundamental data trading with explanations. Second, Shoulder of Giants part that provides you with full foundation of particular assessment current situation on market – as weekly as daily with video.
6. And last, but not least, by example of FPA, you may see that it is better to deal with those who have not its own trading business, and stands independent from trading process. Also FPA services are free. We are proud are feedbacks of those who use our site content and Youtube.com subscribers to our channel.
Commander in Pips: Yes they also do still exist, but we will not speak much about them. Their major tricks are bid/ask spread manipulation and clients’ stop grabbing. It is normal if you see 1-3 pips difference in quotes of different brokers, but if this spread is 6-8 pips and very unstable, has a tendency to widen occasionally – that is not good at all.
Commander in Pips: Maybe this is not crucial for you, if you make 1-3 trades per day, but imagine how it will be for scalpers. Besides, 5 pips more spread is just for 1 client and 1 trade, but what if they have hundreds of clients with hundreds of trades per day. This is I can say good money…
Second, is about stop grabbing. The point is that Forex brokers surely know where clients have placed their stops. That’s normal. Also as if you trade via exchange you see all orders that have been placed. But while on exchange there could not be any difference with trading quotes and historical price among the traders, on forex it could. When price approaches to clients orders, back-alley forex brokers manipulate with quotes so, that those stops can be triggered. In reality there was no such price on the market. This is very easy to do, especially if you recall how quotes are provided by DD brokers.
1. In the US, choose a broker that has been registered as FCM (Futures Commission Merchant) with the CFTC and NFA. The point is that there are almost 2000-2500 forex brokers in US, or claiming to be in the US, but only about 1% of them are registered as a member of NFA;
2. Do not trust any broker by word or advertisement – check out its status (has it registered with NFA or not) by phone (800) 621-3570 or on the NFA website's BASIC search;
3. Do not be upset if you’re not in US – many other countries also have regulators as well I will list some of them in the next lesson of this chapter;
4. Also the NFA is doing much to prevent frauds on the Forex market. Once it has released some NFA basic course. We recommend you to read it;
5. Also we do our own work. We suggest you to read Pharaoh's education folder in the forums, especially his article on broker choosing procedure and our reviews of brokers.
6. Do not deal with a broker that is not a member of NFA/CFTC or other major regulator and do not put money with them. Do not tell us later that you haven’t been warned.