Retail forex market has been swarmed with forex robots. Everyday you will find a new forex robot being launched with a lot of fanfare and tall claims. Now an important question that should come to anyone's mind is that can you trust the screeshots shown on a forex robot website? Most of these websites have been designed solely for the purpose of marketing and selling that robot. Almost all these websites talk about Back Test Results. Let's discuss what these back test results mean. A back test is done when you use historical data to test the performance of any automated system or what you call a trading robot. Now suppose you have historical data about say one of the popular currency pair GBPUSD. You can back test the robot and see how well it could have performed over that period of six months. 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 simply ignores spreads and slippage. For example, the spread maybe 2 pips during the day but it might widen to 5 pips in the night. When there is some economic news release, again liquidity dries up as most of the big players want to watch the market and stay out under volatile conditions. At the time of economic news release like the NFP Report or other important reports, you might find the spread to widen to as high as 20 pips. When you are doing the back test, these factors are simply being ignored. It is being assumed that the spread is the same say 2 pips. Now, you can well imagine how accurate a back test can be. It can only be a rough indication of the future performance of the robot and nothing more than that. So back testing simply ignores the widening of spreads and the slippage that are always present under live trading conditions. This was the actual truth about back testing. What about forward testing? When you test a robot on a demo account, it is known as forward testing. When you do demo trading, you are using real time data but the money in the account is virtual or fake. Demo accounts have a totally different behavior as compared to live accounts. Many traders come to know this after doing live trading as the results they got on the demo account were totally different than they got on live trading. What can be the reason? When you place a buy or sell order, the broker will find a party that will take an opposite position. This is also called offsetting. This is done automatically through the broker's trading server. Now this is not instantaneouly. It can take sometime. In some cases, it is impossible to find someone to take the opposite position to your buy or sell order. So what is possible on a demo account may not be possible on a live account. So what gets executed on a demo account maynot get executed on a live account. The only test of a forex robot is live trading.
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