The Flaws in the System | GoLearnForex

The Flaws in the System

Written by article default Tuesday, 15 December 2009 10:53

If you are reading this article, then I can pretty much guarantee you have a big interest in trading the Forex markets for consistent profits. Let's be honest, everyone's interest in trading of any kind all starts because of the attractive profits and lifestyle it can generate. Then, after putting some money in an account and losing it quickly, the dream usually becomes a nightmare and this is the unfortunate scenario for the vast majority of independent market speculators in the world today. Novice traders suffer for many reasons, many of which I have highlighted in past newsletters. A lack of education, discipline and correct planning are often overlooked in the early days of a trader's career due to the fact that most consistent losing traders suffer from focusing too heavily on making money and making it quick. Trust me, I have been there and I have yet to meet any other successful trader who hasn't also shared these experiences. It's all just part of the journey and if lessons are learned along the way, then these experiences can end up being some of the best things to happen to a trader for they can be grounding and help us to not make the same mistakes and errors in the future.

With this in mind, I would like to share with you one of the biggest "lessons" I learned in the early stages of my own trading career in hopes that you don't fall prey to the same hurdles I faced myself. After reading numerous books and researching the internet for the best ways to use indicators, chart patterns and technical analysis, I became frustrated with my lack of progress (if truth be told, I wanted to make lots of money in the shortest possible time!) and decided to extend my quest for the Holy Grail further in the search for my secret to trading success. You see, patience had always been my biggest issue, as I never had a problem with pulling the trigger and jumping into the market with both feet. My constant eagerness to be a part of the action was costing me and giving me poor entries with big stop losses and the inability to capture healthy profits. I needed help...something to take the emotion out and one day while doing my research, I found it: An Automated Trading System.

The Automated Trading System (or ATS, for short) promised to help me become consistent in the Forex markets, as it had been developed by one of the industry's most recognized and celebrated traders (although I can't seem to remember the name right now), an individual with over 20 years of experience in the markets. This person had managed to pull together all of their knowledge and winning strategies for the markets and programmed this into a self-sufficient, unemotional, red-light/green-light ATS which could tell me when to buy, when to sell, and get it right around 90% of the time. I was blown away...as far as I was concerned, that brand spanking new Aston Martin was just a few months away! The system even used a long-forgotten Forex trading opportunity scanner, which was originally used on the industry trading floors. This was powerful stuff and I wanted it now! So, being the kind of guy with no apparent problem to pull the trigger and jump in, I decided to take a shot and happily parted with a couple thousand dollars for the privilege of my very own ATS. Can you guess how it all worked out for me? Let me share...

At first it worked quite nicely and I was getting some decent wins, especially as the ATS "told" me when to get in and to get out. This definitely helped with my patience problem as I would only wait for the system to tell me what to do. For the next few weeks, I would get up early to be there at the London Session open and wait for my signals to get onboard with the latest big winning opportunity. In all honesty, it was a good few weeks. Sure, not every trade was a winner, but some came in with decent 150 pip moves so I was happy. However, the one thing which did concern me a little was the size of the stop losses. To me, they were bigger than I had ever used and many times, not offering a decent 1:2 risk to reward ratio, let alone anything better. It was almost like the ATS wanted to give itself room to be right more often than wrong. I then began to notice that it was telling me to close trades at times when I would have only made a 1:1 risk to reward ratio, only to watch the market carry on without me after I had closed the trade. Been there done that already!

Not being too happy with the size of the stops I was being told to use by the system, I decided to take a little break from using it with my own money and went back to using the simulator with the system for a couple of weeks and typically it worked great, picking some big winners and giving me the confidence once again to get back to real money. However, it was upon my return to using my own real cash again that things started to go wrong. You see, things are always easier on the simulator, as even though one may well be sticking to the rules of the strategy, there is no real money on the line, thus making it easier to pull the trigger and be bolder with letting a winner run. It was almost like somebody out there knew that I had gone "live" again because upon my return, I went on a heavy losing streak with the ATS failing more often than not and with the size of the stops I was being told to use, I was quickly eating away at any profits I had made in the preceding weeks. Why was it no longer working for me? I now know the answer to this question and will happily relay my findings to you now.

The biggest single problem with any ATS is that it is only as good as the person who programmed its instructions in the first place. Looking back at the ATS I was using, I now know that it was purely a Breakout system, which in my opinion is the highest risk trading strategy available. Sure, breakouts can work from time to time, but they rely on strong momentum which is typically found in powerfully trending market conditions alone and to be honest, markets don't trend as often as we would like, in fact only around 30-40% of the time. What are we to do when conditions are range-bound? The system simply cannot cope as it is applying the wrong technique for the current scenario and is destined to fail. The other flaw with the breakout is that it involves a trader Buying after a period of Buying or Selling after a period of Selling, which involves the highest risk and lowest reward conditions to make any potential gains. The majority of ATS or "Black box" systems rely on some kind of technical indicator to give the green light to get into a trade, and if a trader uses indicator signals alone to enter trades, then their career is destined to be short-lived, as all indicators lag behind price and they will inevitably find themselves late to the game more often than not. In the ongoing Extended Learning Track (XLT) program, I teach my students to focus on the best single indicator of all: Price. This is something that all ATS robots fail to pay attention to.

Take this recent example from last week's XLT Forex session:



Here we have a chart of a recent trade in the XLT room: A short on GBPUSD at the price of 1.6704. The XLT students took the trade by selling high in an area of Supply, well before the downward move took place, as this area offered the highest potential reward and lowest risk. Some 450 pips later, the students are reaping the reward of a successful, low risk trade and no ATS told them to take it – price action did, nothing more, nothing less. As I have marked off on the chart, most ATS robots would have attempted to tell the trader to sell at the Moving Average crossovers or at the lower breakout point, with both entries ending up as likely stop-outs, purely because the system is suggesting that we should sell after the selling has taken place. In the long-run, this technique is doomed for failure.

I personally have and teach to my students a specific trading strategy which is based around simple logic, risk awareness and price action. This system is different from any other ATS in that it can be evolved to market conditions, be they trending or ranging. The problem with any Automated Trading System is that it fails to ever change its strategy to current market conditions, an ability we possess if in fact we do things for ourselves. As human beings we already have the greatest computer within us: Our brain! I suggest to students to make use of it in their trading and do things for themselves, rather than rely on something else.

Time and time again, I see advertisements like this on the internet, with companies proclaiming they have the best ATS ever, with guaranteed returns being dangled like a carrot in front of novice traders across the board:



Don't get me wrong, I am not trying to undermine or poke fun of these sites but rather warn my readers of the dangers these ATS systems can bring, as this is simply the harsh reality of the market. Note how this system can "double your money in 2 weeks," is a "100% No Loss Robot" and appeals to those who are "looking to make the most possible profit." Well, my friends, here is the reality: You can double your money in 2 weeks if you take huge risks in the first place and run the danger of wiping out your account. There is no such thing as getting it right 100% of the time – just ask Warren Buffet, The Turtle Traders and any other consistent trader/investor in the world today. And finally, if you are looking to make the most possible profit in the quickest time, then you are flawed from the very start as trading success comes from focusing on how to protect your money before making it. Unfortunately, too many people out there want the quick, easy fix and I hate to shatter your dreams but in trading, this does not exist. If it were that easy, then everyone would be doing it.

Just ask any student of Online Trading Academy or the XLT program and they will tell you that consistent trading success comes from commitment, the right education and ongoing support, which is why they came to Online Trading Academy. Online Trading Academy offers its students a lifetime of support to help them truly understand the nature of the markets and gives them the tools to apply in any trading conditions. And I will be honest, this ATS in the above example may only be $199, but you tend to get what you pay for in my experience and I know the skills and mentorship of the likes of the Online Trading Academy instructors who teach Live at the market is worth far more than just $199!

A good trading strategy, if used correctly, will last a trader's lifetime. The trader just needs to know how to adapt the technique to suit evolving market conditions, something no ATS could ever do. If you are still not convinced by my argument, then fair enough. This has just been a warning, but please just think about one thing: Let's say you had invented one or more of these systems and it worked 100% of the time, would you sell it? Would you go through the hassle of advertising it and having to deal with customers? Or would you keep it to yourself and use it as a license to print free money and live the life of your dreams? Food for thought I would say. Just remember this: If that system that I originally bought "contained a long-forgotten Forex trading opportunity scanner, which was originally used on the industry trading floors," then why was it forgotten?! Ah, if only I thought the same way back then as I think now...