In this part 3 of "Do expert advisers or Forex robots really work?" I will show you what to look out for when buying an EA. In the first two post I showed you how the variables of a forex robot can be manipulated to achieve great results. I talked about the concept of curve fitting. In this post I will again show you screen shots of test results and how to read the MT4 reports displayed on the landing pages.

I just want to make something very clear, and I mentioned this in my previous posts. I'm showing you something that I discovered while programming my EA's. I'm not a consumer watchdog or anything like that. I feel that the people buying these robots have the right to know what to look out for. These posts might even help developers create better products that people will want to buy.

So, let's get started.
There are a couple of things that bothers me a bit about these robots that are sold. The first thing, and I mentioned this in the first post, is why you would sell an expert adviser that is very profitable, and why for only $97 or $79? I still don't get it but maybe some day I'll understand why.

The next thing is, why is there not a trial version of the robot. If it's that good then give me a 1 week or 1 month trial version so I can test it. It's possible to program a temporary license in the EA so why not? They might argue that 1 week or 1 month is not enough time, and I agree, but at least I can run back tests on it to see how it would perform over a long period of time.

Well, there's not a lot I can do about the two points I talked about, but what I can do is look at the sales pages which would help me in deciding to buy the robot.
 
The marketers of these EA's usually have reports that show you the performance of the expert adviser. There are a lot of information on these reports and you can use this to check how good the robot really is. I will use some figures to explain this.

In post 2, I showed you some reports created by running the back test for a specified period of time. Now let me show you what to look out for.

Report 1 normal run(Click image to enlarge)
 
 
The report looks pretty good doesn't it? Let me show you what to look out for. I marked all the important bits in red.

  1. The first thing to check is the period. In the report above the period is from 1 January 2010 to 1 August 2010. If it's a back test, the period should be at least one year, or preferably, more than one year and the same parameters used for testing. Remember the EA is curve fitted for a period of time.
  2. Check for the modeling quality. If you see "Open prices only" then it's not so good. Open prices only means the bar open and close prices are modeled and not the individual ticks. Look for "Every tick" this is the most precise method. In my report the modeling quality is "n/a", that's because I used open prices and not every tick. The reason why programmers sometimes use open prices is the optimization takes much less time cause only the open and close prices are used. If you use every tick the optimization can take hours, even days. This must be 90%.   Anything less is unreliable.
  3. Check the "Initial deposit". I used $10000 in the example. I don't know about you, but I definitely don't have that kinda cash to invest in a piece of software I hardly know. This is debatable, but I think $1000 would be a more realistic starting deposit. It all depends. The developers might just want to show you what you could make if you invested $10000. Look for multiple reports with different start balances.
  4. Look at the "Profit factor". Anything above 1,5% is considered good. Again, this is debatable. The example report below show a "Profit factor" of 1.31% and yet the EA has produced a profit. If it's too high or too low be careful. If it looks to good to be true, it probably is.   
  5. Then check things like the "Draw down", "Gross loss" and "Gross profit". If the draw down is very high, let's say more than 50%, then it means you have lot's of losing trades and this might blow your account if you start with a small initial deposit. Make sure your "Total net profit" shows a decent profit. What's decent? Only you can decide that. 
Now, look at the report below.(Click to enlarge)
 

This is my EA I created. Now let's have a look the points circled in red.

  1.  The period is a full year from 1 May 2009 to 1 May 2010. So this is a full 1 year back test.
  2. The modeling quality is 90%.
  3. The initial deposit is $1000.
  4. The profit factor is below 1.5% but it still made a good profit.
  5. The draw down is also not too bad at 33%.
All in all, not too bad. Remember what I said, there should be more than one year back test with the same parameters used. If it isn't the same, then it was curve fitted. You can check the parameters if you look at the "Parameters" option in the report.

The next report will show you that my EA does not so well with a different date period.

Second report, different date period. (Click image to enlarge)


Hmm, not too good for 2008-2009. The parameters are all the same, but the profit factor and draw down doesn't look good. I still manage to get a small profit from it, but $298 a year, is hardly getting excited over. If you look at the report there was a date period where the EA's profits just dropped and dropped, and then suddenly it picked up again.

I played around the EA and I had better results if I ran it with a 1 hour period, but I just wanted to show you what to look out for. There's so much I could have shown you but it's beyond the scope of this post. Use google if you are unfamiliar with the terms I used like, draw down, modeling quality and so on. It's just too much information to use in the post.

When you look at the sales pages, you might not see all this information I showed you. They might not use detailed reports like I did. Just try to look through all the information provided and use review websites to see what other people say about the product. I use a forex review website called forexpeacearmy. They have great reviews on trading systems and robots. Use the website and look at the reviews.

Last thing, if you look at the sales or landing page of the product there's usually a affiliate link. I have found lots of information about the EA on these links. Affiliate links are used if you are interested in marketing and selling the EA for a commission. You sometimes find information about upsells and other information about the product that you would not have seen on the actual sales page.

That's it!. I hope you found these posts useful. Just remember to try and look at all the relevant information before you buy. There are some good EA's out there you just need to find them. If the programmer has a profitable EA, he will make all the information available for you to look at.

May the force be with you.
Pieter Joubert