One of the dirty little secrets in the forex market over the last few years has been the huge growth in so-called “robot” trading – Robots are nothing more than automated programs that work off of fancy mathematics based on historical market patterns.
But there’s a real problem with Robots: They don’t work.
Oh, you’ll hear all the fancy talk about how so-and-so turned $10,000 into $ 150,476 in just seven days…
…but it isn’t true. It’s hype and it’s based on ‘hypothetical’ historical trading.
Fact: Most forex traders who use forex robots LOSE MONEY.
Truth: Robots lose money because they have disproportionate RISK MANAGEMENT rules built into them.
What the Robots go after are small, quick profits — 3 pips, 7 pips, 9 pips. And over the course of a series of trades, the Robot’s ‘Winning Percentage’ will be very high — 85-95% winners.
BUT the Robots have a fatal flaw: their stop losses are out of line with typical reward to risk ratios, usually on the order of 1:5 or 1:10 (that means you, the trader, are risking $10 to win $1. In gambling, this is known as “sucker betting” and you’re the sucker).
Here’s what’s really going on with those Robots: The stop losses are set so wide that ONE TRADE can wipe out the profits from those “85%” winners. That’s because the gains you’re making on the winners are miniscule compared to the losses you take with the built-in risk – or lack therein.
Dirty little secret #2: The percentage of winning trades is inversely proportionate to the reward:risk ratio. The higher the percentage of winning trades, the lower your reward ratio; the lower the percentage of winning trades, the higher your reward ratio.
This means if a Robot claims to have 90% winning trades, your reward to risk ratio will be around 1:10.
Truth? Don’t fixate on ‘winning percentages’ — focus on managing the risk in every trade and keeping the reward to risk ratio in YOUR favor.
Watch this video proof of how this concept can radically change your forex trading:
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