Forex traders face the stark choice of whether or not to entrust the management of their forex accounts to automated trading systems or leave it to the fund manager to trade on the account based on his hunch and trading experience.
In recent years, automated trading systems have sprung up and a Google search will bring up a host of systems promising heaven and earth, massive profits and a sure ticket to happiness and fortune.
But has life become that simple? Definitely not. Most of such automated systems promising high returns are back tested models, meaning the performance is tested backwards on a mix of currency pairs until the desired profit performance is achieved after which the marketing teams go into action.
When the customer signs up for the automated trading system, the actual performance usually does not match the previous performance, which is why investors should listen to the trusted warning that “past performance is not a guarantee of future performance.”
This does not mean that all automated trading systems are marketing tools to suck in unsuspecting investors. There are many systems which deliver good results. By far the most popular automated trading systems are the Expert Advisors, many of which are monitored by independent sites and their performance published.
Here as well however, there are a number of tricks increasingly used by the Expert Advisors or the sites monitoring their activity to boost performance whereby the pips made are reported as the equivalent of dollars, whereas in actual fact, the performance is a fraction of the reported amounts.
The Fund Manager on the other hand is usually bound to give an accurate trading history since in sharp contrast to the developers of the Expert Advisor systems, the Fund Manager is a licensed person employed at a regulated investment firm, as opposed to the EA developer who is usually a programmer, with good knowledge of computers and mathematical systems.
As for trading strategies, the automated systems are based on trend indicators, previous tops, bottoms as well as Fibonacci retracement/extension levels, daily pivot, MACD, RSI and so many other technical indicators.
Since the trading signals are automated, they are very easy to fool, and many times, such systems get burned with false breaks, stops and then reversals.
The Fund Manager is also bound to use the same technical analysis tools, but is most likely to combine these with fundamental news, economic data, research and his gut feeling on every move in the forex market.
So when both enter a particular trade with predetermined stop and profit targets, the automated system is bound to wait until the actual levels are seen, but a fund manager can always act if he notices that the profit target or stop is close but the market is having difficulty in reaching it. The different approach could be a big factor in explaining the divergence in results!