With the relatively recent arrival of online forex trading, many trading systems, advisory services and signal alert services have been made available to forex traders for purchase via the Internet. One example is the hyperactive trading monkey, Trade Chimp.
Many of these systems are offered on websites making unrealistic claims of profitability, with their published results usually coming from “back testing” or hypothetical results. Learn more about cases with unrealistic returns.
While such published trading results may look impressive initially, they have generally been arrived at without committing any funds to the transactions, and only using historical data or “real time” data without actually making any trades.
Also, back testing performance results usually cover hypothetical trading by the product for only a short and carefully selected high performance period, instead of being obtained from actual live trading done over a longer period of time that is considerably more valid.
Hypothetical Versus Real Trading Results
The element of fraud in the sale of these forex trading systems or advisory services consists of the way these services or programs are marketed on the Internet, and the basis for the claims made on the slick websites promoting them.
No system for trading can guarantee profits. Despite claims by vendors and system developers, a trading system is only as good as the trader implementing it.
In order to attract attention marketing these systems, many vendors will publish results of the system’s trading, in many cases using historical data and “back testing” the parameters of the trading system for optimal returns.
The problem with this is that “hindsight is always twenty / twenty”, in other words, using historical data results can have returns on trades appear phenomenal, and not likely to be repeated in a real time trading situation with money on the line.
Real results in a live trading account in the forex market invariably produce a different outcome, sometimes diverging completely from the hypothetical results vendors publish. If you think about it, how easy would trading be if you could buy and sell off of historical prices, choosing your trades from yesterday’s newspaper?
When “Real Time” is not Real
Some vendors claim that the results of their trading systems were obtained using “real time” data. This does not mean that money was used and that a trade was actually made in an account, but that the system was applied to a live data feed instead of being tested on historical data.
While this may lead you to believe that “real time” results would lend more credibility to the trading system, the fact is that no trades were actually made, thereby relegating the results to hypothetical status.
Basically, the problem with the claims that trading systems make using real time results consists of the fact that market conditions constantly change, and prices obtained off of a screen in a hypothetical or demo trading environment can diverge considerably from what might happen in a live trading situation, especially in fast markets.
Therefore, relying on any data which does not come from actual trading using a live funded account in the forex market will only reflect hypothetical results and should not be relied upon or used as a basis for purchasing a trading system.
Another important point to remember is that the past performance results of a product — whether real or hypothetical — do not provide a reliable indicator of future performance results.
Market and Account Related Considerations
In addition to the above mentioned drawbacks, trading systems applied to hypothetical data will not take into account many market intricacies which traders encounter routinely in their trading and which add to the trader’s overall costs. These factors might include such things as the bid offer spread and stop loss order slippage.
Other important considerations that relate to the particular account type and forex broker used might include such things as:
- The financial limitations on the account
- The impact of commissions charged by brokers, especially for high frequency automated trading software
When considering the performance of a trading software package on the Internet, make sure that the results the vendor is publishing clearly states whether the data and the results are either hypothetical or actual.
Take all hypothetical results with a large grain of salt, and remember to ask the vendor for additional independent verification of any actual trading results published.
Potential Vendor Issues to Watch Out For
In addition, make sure that the software you are purchasing comes with some form of guarantee or return policy in case you are not satisfied with its performance.
Many software vendors, especially those touting forex expert advisor software, routinely offer a 60-day money back guarantee which is useful for evaluating the software on a demo account before committing any money.
Nevertheless, it is strongly advised to avoid purchasing any forex trading system making questionable claims unless the system you are purchasing has been tested in a live, funded trading account with positive, repeatable and independently verified results.
Look for Vendors in Locations Subject to Regulation
One final consideration consists of the location of the vendor. Avoid vendors located in poorly regulated domiciles, and instead look for vendors located in a country with an active regulatory agency.
These might include such organizations as the Commodity Futures Trading Commission or CFTC in the United States, Financial Services Authority or FSA in the United Kingdom, or the Australian Securities and Investment Commission or ASIC, for example.
You may have some additional legal recourse with the help of the relevant regulator if the software you buy turns out to have been sold making hypothetical claims that were not disclosed as such.