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forex robots. Retail
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forex market has been swarmed with forex robots. Everyday
you will find a new forex robot being launched with a
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lot of fanfare and tall claims. Now an important
question that should come to anyone's mind is that can you trust
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the screeshots shown on a forex robot website?
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Most of these websites have been designed solely for
the purpose of marketing and selling that robot. Almost all
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these websites talk about Back Test Results. Let's
discuss what these back test results mean.
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A back test is done when you use historical data to
test the performance of any automated system or what you
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call a trading robot. Now suppose you have historical
data about say one of the popular currency pair GBPUSD.
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You can back test the robot and see how well it could
have performed over that period of six months.
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Now a good back test can only be an indication that
this robot can work. It doesn't mean that it will as a back test
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simply ignores spreads and slippage. For example, the
spread maybe 2 pips during the day but it might widen to 5
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pips in the night.
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It all depends on the liquidity in the market. At the
time of news release, spreads can widen as much as 20 pips.
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So what's use a back test is when it simply ignores
these important factors that are present in live trading. Some
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robots cannot be back tested. This is another
limitation.
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Now, most of the time you will be told that you can
test that robot on your demo account. Demo account testing is
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also known as Forward Testing. But here again there
are limitations as demo trading is not live trading and there
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are many differences between the two.
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Demo accounts behave differently than live accounts. You
should know this. In demo trading, you are using virtual
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money or fake money. This is one difference. Let me
explain how this makes a difference. When you buy and sell,
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the broker has to find someone who can take the
opposite position. This is known as offsetting.
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This is done automatically through the broker's trading
server. Now this is not instantaneouly. It can take
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sometime. In some cases, it is impossible to find
someone to take the opposite position to your buy or sell order.
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So what is possible on a demo account may not be
possible on a live account. So what gets executed on a demo
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account maynot get executed on a live account. The
only test of a forex robot is live trading.
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