The Trading of Commercial Systems : The Great Short Comings of This Approach

When I first started my journey in automated trading one of the first things I did – like so many other inexperienced traders out there – was to get my hands on any commercial automated trading strategies that seemed to offer the greatest profit with the lowest possible draw down. Looking back at this early period of my formation as an automated trader designer I can see how wrong I was to think that the solution to profitable trading relied on just finding the EA that “worked” placing it on my platform and watching the money roll. On today’s post I will tell you what I believe are the greatest short comings of commercial system trading and why I believe success is a ton more difficult to achieve using commercial EA trading solutions.

Of course, it seems so simple : you buy an EA, you set it, you forget it, you make money. Who hasn’t dreamed about this and who hasn’t spent months or even years looking for that EA which just “works” ? An EA that brings profit with little draw down in a consistent long-term manner. To tell you the truth, I am not here to tell you that there is no commercial EA that fulfills their promises and that you cannot find a commercial EA with which you can make money with. I could in no way make such a broad generalization as there are in fact some developers out there who have some systems that have made money.

However the problem of succeeding with the use of commercial systems far exceeds the finding of an EA which has been making money in live trading or backtests. If you had a commercial EA which had made money during the past 10 years in reliable simulations, had enough live testing to prove consistency and had no use of martingale or other unsound techniques, would you consider yourself safe? Would you believe that you have found the so promised “grail” which you can use to reach your financial freedom?

The answer is a chilling NO. Even if you had a system which had absolutely all desirable characteristics in order to trade it, using it will not guarantee success to you. There is an awful truth in trading which new traders are seldom taught, a truth you realize as you gain experience in the market with algorithmic strategies. My friends, all sound and good systems will eventually fail as the probability of failing is never zero.

Now, when we talk about “failing” things start to get a little bit tricky. What do I mean by “failing” ? A system fails when its statistical characteristics no longer match the long term characteristics derived by previous back and live testing. This means that a system fails whenever whichever inefficiency you wanted to exploit becomes non-existent, the system has lost its long term statistical edge or it has been reduced in nature to the point where the risk vs reward characteristics of the system are no longer desirable.

When you are using a commercial EA, the reason why the seller developed his system and sold it to you was to make money by selling his/her system – not by trading it – and therefore when the system fails the seller usually moves on with a big pocket gain from your purchases and no losses (or usually losses far smaller than what the true users lost). A seller can then create another system and restart the cycle, pocketing a lot of risk-free money in the process without ever worrying about actual profitability (except for a very small track record used to sell the system).

The big reason why I believe success with commercial systems is much much more difficult is because you are relying on black-boxes to do your trades, having usually no idea about the long term statistical characteristics of the system, its worst case scenarios derived from sound statistical criteria (like Monte Carlo simulations), etc. There is no set way to behave when the system fails, no strategy to replace it, etc except for the arduous search for another “good” mechanical trading strategy, exposing yourself to all the trickery deception and lack of properly audited evidence available in the world of commercial expert advisors.

I for one believe that success in automated trading lies in knowing what you are doing. Develop your own strategies with long term statistical edges, strategies you have confidence in and strategies for which you know their coding, worst-case scenario statistics, etc. Get a lot of knowledge in trading and statistics, have a plan for whenever a system fails and have an army of systems to interchange whenever one of them shows to fail its long term intended purpose. When you know what you are doing what to do, when to do it and how to do it is clear, when you don’t know what you are doing and you’re trading black boxes it is a matter of dealing with a lot of frustration a lot of third parties and a lot of additional hassle.

I can tell you that many successful algorithmic traders I know (and even large institutions) work this way, coding their systems, learning about their statistics, evaluating them closely, replacing them when they fail with new strategies, etc. On the other hand I don’t know a single person who lives from his or her income from commercial expert advisors (if you know one, please do comment so that we can run an interview ! :o) ).

So my advice here is simple. Learn about trading, learn about statistics, become a trading professional and treat your algorithmic trading endeavors like your business. In my opinion and experience this is a much more certain way of becoming successful as an algorithmic trader. If you would like to learn more about my work and how you too can learn how to develop your own strategies using sound techniques please consider joining, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to automated trading in general . I hope you enjoyed this article ! :o)

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2 Responses to “The Trading of Commercial Systems : The Great Short Comings of This Approach”

  1. Hi Daniel-

    Great article and as usual you are right on the money.

    I look at commerical EA’s mainly to try and figure out how they work. I’m sure there are some very experienced traders out there who have some time-tested ideas that we haven’t considered that might lead better systems and results.

    Most of time, they don’t reveal their logic, but sometimes they do. One recent example is Fish Forex, which nearly gives you the complete logic in the manual.

    Keep up the great work and take care,


    • admin says:

      Hi Chris,

      Thank you for your comment :o) I am glad you liked the article !

      Certainly I am not saying that people should avoid to look for ideas in commercial systems as – as you say – it might be possible to find systems from which you can extract something new and useful. However what I refer to is that looking to succeed by actively trading only black boxes is undoubtedly extremely hard since the intention of sellers is not the client’s profit but the selling of trading strategies also usually lacking any substantial future support effort (if the strategy fails its long term profit/characteristics) or worst case scenario rules. While successful traders focus on risk, EA sellers focus on emphasizing profit, a clear difference in objective which often changes how systems are designed and traded.

      I simply think – and I think overall evidence shows this – that success requires to trade systems you understand developed with capital preservation in mind with accurate worst case rules derived from formal statistical criteria. If a person can take criteria exposed by a commercial EA and build him or herself such a system that is terrific but if he or she seeks to rely solely on the black boxes being sold then chances are he or she will never get there (as I said I don’t know anyone who has succeeded this way). Thank you very much again for your comment Christ :o)

      Best Regards,


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