In Forex trading, I'm often faced with how one can identify a reliable Expert Advisor (EA) product that is genuinely profitable and not a scam. Many novice traders believe that if backtesting trades align closely with those in live trading, this is a solid indicator of a legitimate EA.
However, this belief is a misconception fostered by the industry itself, and it's high time we debunked this myth.
Consider one of my products, "Draw a Bow." Regardless of the extent or method of backtesting, the results deviate significantly from those in the live trading account. Despite this, it has traded in a real account for the past two years. You might wonder why does this discrepancy occur?
Purpose of Backtesting: The foremost reason lies in the core purpose of backtesting. It is merely tool developers use to identify and rectify bugs in the EA, not a crystal ball for predicting the future performance of the EA.
Lack of External Factors in Testing Mode: During backtesting, the system operates without several crucial factors influencing live trading. This includes news filters, data mining capabilities, and trend detection mechanisms using external data from Metaquote systems.
Broker-specific Quoting Differences: Backtesting results rely on one historical data set, even when using 100% tick data. However, in live trading, the quoting price will differ between brokers, resulting in dissimilar trade outcomes.
Inconsistencies Even Under Similar Conditions: I have tested "Draw a Bow" across three different accounts, each running simultaneously with the same server and equivalent capital. Yet, after three months, the results across these accounts varied significantly.
In conclusion, judging the efficacy of an EA solely based on backtesting can lead to a dangerous oversimplification. It overlooks crucial variables that contribute to the dynamics of live trading, such as broker differences and external data influences. Consequently, determining whether an EA product is reputable requires more comprehensive assessment methods.
Evaluating an EA's effectiveness in the real trading world, its longevity, adaptability to various market conditions, and ability to generate profits consistently are much more reliable metrics. Therefore, traders should develop a more holistic approach to discern between scam products and truly profitable EAs, moving beyond the misleading facade of backtesting results.