Do Forex Robots Work? 3 Technical Reasons Why They Fail

The following are 3 technical reasons why robots fail to deliver profitable results in the long term.

The first main reason why most robots lose money in the long term is because they risk a lot for little profit. It is a proven fact that to become a profitable trader, money management is the key. Top traders have effective money management system in place and they stick to it. They only risk 1% - 2% of their trading capital per trade. Furthermore they use trading systems with at least 1 : 2 risk to reward ratio. What this means is that in every trade they are risking 35 pips to potentially earn at least 70 pips. This doesn't mean that in every trade they will always earn double of what they risk. But using trading systems with favorable risk to reward ratio is the best way forward to be profitable in the long term.

Most robots take the opposite approach. They risk a lot for little profit. I have recently tested a robot where the stop loss was set to 70 pips for a profit target of 10 pips. An extremely bad risk to reward ratio. Some also come with no stop loss! A bad risk to reward ratio is just the best recipe for blowing out your trading account.

Now most robots developers boast with the accuracy of their robot. They claim numbers like 84% or 90% strike rate and similar large numbers. Intuitively you will think that "I will win most of the time, so it is not a problem". But the question you should ask first is, "How much the robot loses when it hits a bad trade?". How about 2 or 3 successive bad trades? Does your account survive in this case?

The second reason why robots fail is because they can't feel the market. They are robots - a piece of software logically written to do specific tasks. They cannot think. They cannot analyze the charts the way you do. They cannot identify potential turning points for the market like strong resistance / support levels, trend lines and pivot levels just to name a few. They are not programmed to analyze these. If the developer has programmed a profit target of 30 pips, the robot will keep waiting until the profit target or your stop loss is reached.

Furthermore what if the market is slowing down and it seems that the move has no more fuel to go forward? The robot will keep waiting, but a trader will close the trade at a profit even if it is smaller than the normally targeted profit. In the meantime the robot is still waiting, and the worst that can happen is that the price reverses and hits your stop loss.

On the other hand, what if the move is so strong, that it reaches your profit target in few minutes or hours? Your robot has closed the trade at the programmed profit target, but again the robot is not feeling that the move is so strong and the trade has more fuel to burn. A trader will close half of the position and leave the remaining part riding the move for more profits. In this case, the robot could have made more profits, but it has again failed to do so.

Since robots cannot analyze the charts properly, they are not able to place stop losses and profit targets appropriately. They also are not able to stay out of the market even though there is a trade setup. They just enter the trade blindly. This is the third reason why they fail.

If for example there is an entry setup to go long and a daily trend line or one of the pivot levels or both are a few pips away, a professional trader will simply wait and observe the price action of what is going to happen at these strong resistance points. It is very common that the price will reverse at these levels, hence the trader will go short but the robot will go long. Then you wonder why a trade went wrong!

This reasoning also applies to appropriately place your stop losses and your profit targets. Your stop losses and profit targets most of the time must be below strong resistance levels for buy trades and vice versa for sell trades.

This kind of analysis is done intuitively by a trader, but it is impossible for any robot.

These are just 3 major technical points why most robots fail, and fail miserably. So before you purchase any robot, analyze the robot's drawdown, see if any forward test results are provided and whether or not the EA will be updated in the future.

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