Myths vs. Reality: Why Do Forex Trading Robots Fail?

Why do trading bots fail?

Trading bots have revolutionized the way we approach the markets, offering a blend of efficiency and consistency that is hard to match with human trading. However, the path to automated trading success is fraught with pitfalls that can lead to the downfall of trading bots.

Understanding why these tools fail is crucial for any trader looking to integrate automation into their strategy.

Strategies that are too simple

Forex is an extremely complex and highly competitive market. If you want to survive in this market, don't rely on strategies that look too simple.

ChatGPT writes code for a Forex trading bot

With ChatGPT you can quickly create a trading bot, for example, to trade the RSI indicator. But this will not give you a trading advantage, because any of the market participants can also make such a bot.

Unsustainable core strategy

At the heart of any trading bot is its core strategy — the algorithm that dictates its trading decisions. A common misconception is that a trading bot is a set-it-and-forget-it solution.

The truth is far from it. Many bots are programmed with strategies that are not robust enough to withstand the test of time. They may perform well under certain market conditions but fail when those conditions change. The result? A strategy that was once profitable becomes a liability.

Unfavorable trading environment, market volatility

The financial markets are notoriously volatile, with conditions that can change rapidly and unpredictably. A bot programmed to follow trends might flounder in a range-bound market, while a bot designed for a quiet market could face disastrous losses when volatility spikes.

When market changes outpace a bot's programming, the bot can generate significant losses before it's manually stopped or adjusted.

Lack of understanding

Many users deploy trading bots without fully understanding how they operate. They may not grasp the strategy behind the bot, the conditions under which it performs best, or how to intervene when things don't go as planned.

This lack of understanding can lead to inappropriate use of the bot, resulting in poor performance and potential losses.

Overreliance on automation

Overreliance on trading bots is another pitfall. While automation can significantly enhance trading, it cannot replace human judgment and oversight. Market conditions often require a nuanced approach that a pre-programmed bot may not be able to provide.

Without human oversight, a bot may continue to execute its strategy inappropriately, leading to compounded losses.

Poor risk / capital management

Risk and capital management are essential components of successful trading. Some trading bots, especially those utilizing high-risk strategies like the Martingale system, can lead to ruin.

The Martingale strategy, for instance, involves doubling down on losing positions in the hope of recovering losses with a single win. While this can lead to impressive-looking gains in the short term, it can also lead to catastrophic drawdowns, exhausting the capital of the trader.

An example of a bot using the Martingale strategy, which is extremely risky and can result in catastrophic losses

Technical failures

Technical issues such as software bugs, connectivity problems, or platform outages can also lead to bot failures. A disconnection at a critical moment can prevent a bot from executing trades or managing positions, potentially leading to uncontrolled losses.

Scammers and low-quality robots

The allure of easy money has attracted numerous scammers to the automated trading space. They sell low-quality trading bots that promise high returns but are often based on over-optimized backtesting results. These bots can give the appearance of profitability for a short period, only to fail spectacularly when exposed to live market conditions.

The most expensive Forex robots

The price of the most expensive Forex robots on the MQL market (embedded in the MT4 terminal) is 30 thousand dollars. But this high figure does not mean that a trading bot is worth this money at all. And check, the seller will not be able to give you a guarantee that the robot will not turn out to be unprofitable.

Best Forex brokers for Trading With Bots in 2024

1

9.4/10

Go to broker

eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Don’t invest unless you’re prepared to lose all the money you invest.

Minimum deposit:

$50, $100 (for UK clients)

Bonus for deposit:

0%

Regulation:

CySEC, FCA, ASIC

Review

The eToro broker was founded in 2007. The company promotes itself as a social trading platform working with traders from over 140 countries. The broker has several divisions operating under different jurisdictions and licensed by different regulators. For example, eToro (Europe) is licensed by the Cypriot regulator CySEC (109/10) and eToro (UK) is licensed by the British regulator FCA (583263). The broker also has a representative office in Australia and the USA. eToro Profile Details

Pros/Cons

•the minimum transaction amount for copying is $1;

•handy functionality for passive investing;

•regulated by independent monitors;

•it is possible to purchase contracts for fractional shares (that is, to invest amounts less than the cost of one share);

•it is possible to buy shares at once (not CFDs) on the US stock exchanges.

•high spreads;

•periodic technical failures in order execution;

•lack of the most popular platforms such as MetaTrader 4 and MetaTrader 5 in Europe and the CIS;

•no access to ECN systems, orders are processed only according to the STP (straight-through processing) scheme with access to specific liquidity providers;

•there is a commission for withdrawing funds;

•impolite support staff;

•inconvenient website.

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2

9.2/10

Go to broker

Your capital is at risk.

Minimum deposit:

No minimum

Bonus for deposit:

0%

Regulation:

FSC (BVI), ASIC, IIROC, FCA, CFTC, NFA

Review

The name OANDA is an acronym for “Olsen & Associates” or “Olsen AND Associates”. It is registered in the United States and provides its clients with a wide range of financial services in most countries of the world. The company was founded in 1996 and is currently regulated in four jurisdictions. The main regulator of the broker is the UK Financial Conduct Authority (FCA). Oanda Canada is licensed by IIROC. The company has several significant awards to its credit, including a victory in the category "Best Forex Trading Technologies" from the UK Forex Awards, "Best Trading Platform" from FX Week, as well as "Best Customer Service" from the US Foreign Exchange Report.

Pros/Cons

•Minimum deposit from 1 dollar.

•A large selection of the most popular trading instruments.

•Several reliable and reputable financial regulators.

•Inconvenient and poorly functioning site.

•Lack of cent accounts.

•Lack of bonus programs.

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How to avoid pitfalls with trading robots

Reaping the benefits of automated trading requires more than just a set-and-forget mindset. To sidestep the pitfalls that lead to the failure of trading bots, a strategic approach encompassing research, understanding, and continuous oversight is essential.

Here’s how traders can fortify their automated trading strategies and avoid common traps:

Proper research and selection

The first step to a successful trading bot experience is the selection process. Not all bots are created equal, and thorough research is paramount. Traders should look for bots with a transparent track record, verified by independent platforms.

Trusted forums and financial software communities often rate Expert Advisors (EAs), providing a wealth of user experiences and performance data. Choose a bot with a solid reputation and a strategy that aligns with your trading style and risk tolerance.

Here is an article that will help you reduce the risks of getting a loss from forex trading with a robot: Which Free Forex EAs Are The Best?

Understanding the bot's strategy

A deep dive into the bot’s strategy cannot be overstated. It's crucial to understand the underlying principles that drive the bot's decisions. Whether it's a trend-following, mean-reversion, arbitrage, or any other strategy, knowing how your bot reacts to market conditions will empower you to set it up for success and intervene when necessary.

Continuous monitoring and adjustment

Even the most sophisticated bot requires oversight. Market conditions evolve, and so must your bot’s parameters. Regular monitoring allows for timely adjustments, ensuring the bot continues to operate within the desired risk framework. Discipline in this process helps prevent emotional trading decisions and maintains a level of control over the automated process.

Setting realistic expectations

One of the most common mistakes is expecting too much from a trading bot. It’s vital to align expectations with the bot's realistic capabilities. High-quality bots often come at a premium and for a good reason. They are typically based on more sustainable strategies and receive better support.

Conversely, cheap or free bots are widely accessible, but they may not provide the stability and performance a serious trader requires.

Building your own trading bot

For those with a technical inclination, building a custom trading bot can be an attractive option. It allows for complete customization and control. Educational resources are available that can guide through the process of building an EA from scratch. This might involve a steeper learning curve, but the payoff is a strategy that’s entirely tailored to your specifications.

If this is something that interests you, feel free to go over our article on Best Expert Advisor (EA) Builders Review.

Professional software for testing and optimization

Utilizing professional backtesting software is a must for optimizing trading bot performance. Such software can simulate a range of market conditions using historical data to test the bot’s robustness. This step is critical before going live, as it helps identify and iron out any potential issues.

Ensure technical setup

A reliable technical setup is the backbone of successful bot trading. This includes a stable internet connection, power backup solutions, and possibly a Virtual Private Server (VPS) to ensure the bot runs continuously without interruption.

Use demo versions for testing

Before deploying a bot on a live account, testing it on a demo version is advisable. Many bots are available for trial on markets like the MQL market. This practice phase helps to familiarize with the bot’s behavior in real-time conditions without risking actual capital.

Use forex bot demo versions to reduce the risk of failure

You should not fully trust the results of tests conducted by other traders using a particular trading bot. Publishing the results without real access to monitoring of the trading account where the test was conducted may be a common advertisement. You need to perform the tests yourself and on the platform of the broker where you intend to use the trading bot.

In the process of testing you will be able to determine the optimal parameters of the trading bot taking into account the technical conditions of the broker and the level of your risk tolerance.

By adhering to these guidelines, traders can significantly reduce the risk of bot failure, turning a potential liability into a potent tool in their trading arsenal.