Testing without Analisys, the Dangerous Ways of Independent Testing

People who know me (as well as people who have been frequenting this blog for a while) know that I am always looking for ways in which I can help and protect new forex traders as well traders inexperienced in the world of forex automated trading from losing money trading expert advisors. During this year, I have realized that one of the most damaging things that drives traders towards losing money on unsound automated trading systems is just what is supposed to protect them from doing so, independent testers.

In my mind, I have always thought that the idea of independent testing and verification is a good one and I do applaud the people that spend the extra money and setup everything so that people can have access to independent results of expert advisors. Nonetheless, what happens most of the time is that testing is done for the sake of testing and absolutely no analysis is done about the expert advisor’s trading strategy, the soundness of the logic or the safety of the money management. Most of the time, independent testers just publish results without any sensible, solid criteria for automated trading system evaluation other than some seemingly random criteria that seems to adjust more to what they would “want to have” in an expert advisor rather than what is actually possible or realistic to have.

The problem of dangerous systems with short term positive results is also a very difficult one. For example, an expert advisor independent tester will test an expert advisor for one year, achieving a profit level of 200% of the initial trading capital. The trading system, for example, has no stop loss and a fixed, very small take profit. Even though any seasoned trader would recognize this strategy as inherently faulted and doomed for failure within the slightest failure of market reversion theory most people would just see the profit levels and would completely neglect any analysis. If the tester does not clearly state that the system will eventually cause an account wipe out people will get this system and trade it in the hope that the 200% yearly profit result will happen every year. Then people will lose their accounts, something which could have been avoided with a simple conscious analysis of the strategy.

I would advice any person doing any sort of independent testing to rigorously examine and analyze every aspect of an automated trading system before committing themselves to the testing or drawing any conclusions. It is worth assuming that many people will have trouble seeing the things that make a strategy worthless when they are confronted with profits, this because most people consider profits “hard evidence” of long term profitability, when this a necessary albeit not a sufficient condition. It is because of this that us, the independent reviewers and testers, should commit to the deep analysis of the strategies, pointing out to people what is fundamentally wrong or right about the trading systems we decide to analyze.

If you would like to learn more about what differences a long term profitable system from an unprofitable one and how you can interpret and evaluate trading results yourself please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

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