| Retail forex market is experiencing unprecedented | | | | find the spread to widen to as high as 20 pips. When |
| growth. It is expected that this market will contniue to | | | | you are doing the back test, these factors are simply |
| grow at an accelerator pace in this decade. This | | | | being ignored. It is being assumed that the spread is |
| phenomenal growth in the retail forex market is being | | | | the same say 2 pips. Now, you can well imagine how |
| exploited to the fullest by the forex robot vendors. | | | | accurate a back test can be. It can only be a rough |
| Every day, a new forex robot is being introduced by | | | | indication of the future performance of the robot and |
| these vendors with tall claims. When you take a look | | | | nothing more than that. So back testing simply ignores |
| at the forward and back test of these robots on their | | | | the widening of spreads and the slippage that are |
| websites, you feel impressed. Most of these | | | | always present under live trading conditions. |
| screenshots are nothing more than marketing | | | | This was the actual truth about back testing. What |
| gimmicks to entice novices to buy the robot. When | | | | about forward testing? When you test a robot on a |
| these robots are put through live testing, they fail | | | | demo account, it is known as forward testing. When |
| miserably. | | | | you do demo trading, you are using real time data but |
| Most of these websites have been designed solely for | | | | the money in the account is virtual or fake. |
| the purpose of marketing and selling that robot. Almost | | | | Demo accounts behave differently than live accounts. |
| all these websites talk about Back Test Results. Let's | | | | You should know this. In demo trading, you are using |
| discuss what these back test results mean. | | | | virtual money or fake money. This is one difference. |
| A back test is done when you use historical data to | | | | Let me explain how this makes a difference. When |
| test the performance of any automated system or | | | | you buy and sell, the broker has to find someone who |
| what you call a trading robot. Now suppose you have | | | | can take the opposite position. This is known as |
| historical data about say one of the popular currency | | | | offsetting. |
| pair GBPUSD. You can back test the robot and see | | | | Now, this offsetting is done automatically by the trading |
| how well it could have performed over that period of | | | | servers with the broker. This might take sometime as |
| six months. | | | | the server searches to offset the order placed by the |
| Now a good back test can only be an indication that | | | | client. Sometimes it is not possible, mostly when the |
| this robot can work. It doesn't mean that it will as a | | | | market is volatile. In demo trading, trades that were |
| back test simply ignores spreads and slippage. For | | | | executed automatically maynot get executed under |
| example, the spread maybe 2 pips during the day but | | | | live conditions. So many trades that got automatically |
| it might widen to 5 pips in the night. | | | | executed on demo trading or what you call forward |
| When there is some economic news release, again | | | | testing may simply not get executed under live trading |
| liquidity dries up as most of the big players want to | | | | conditions. Now, you can well understand that there is |
| watch the market and stay out under volatile | | | | no substitute of testing a robot on a live trading |
| conditions. At the time of economic news release like | | | | account. |
| the NFP Report or other important reports, you might | | | | |