It seems clever, but more often than not it doesn’t work. Traders see any EA that loses so often that doing the opposite trades would practically mint money. It’s so bad that it’s good.
Traders are now accustomed to purchasing junk expert advisors over the internet. The sales pitches vary in the details, but the tone is the same. The vendor claims a scientific understanding, a secret the banks don’t want you to know or some other mystical wisdom that eludes the masses. A comically low price point typically follows.
We all agree that it’s mostly junk for sale on the internet. The problem is that this junk is extraordinarily unlikely to be profoundly good or profoundly bad. Instead, these expert advisors generate signals which perform identically to a random number generator.
As I discussed in my earlier money management series, creating a statistically random outcome is super simple. It could be based on price crossing a moving average with fixed stops and limits, the DI+ crossing the DI- on the ADX indicator or nearly any indicator lines in existence. So long as consistent stop and limit distances are used, the outcome consistently comes out random. Only the length of time in which profits or losses accrue varies among strategies. Nearly all of the alleged strategies return neither profits nor losses over a long enough time horizon. The wild ride up and down forms a random walk that ultimately heads nowhere.
Trading costs example
Trading costs and commissions are the genuine culprit dragging the random outcomes into consistent losers. Consider a strategy that breaks even on every trade. It never wins or loses. This would be a highly unusual random outcome strategy that we smooth for the sake of argument.
The profit is zero, but every trade incurs a cost. The EURUSD typically costs $2 per mini lot, based on zero commissions and a 2 pip spread. Trades in our hypothetical strategy never win or lose. The trading costs ensure that our account decreases $2 after every trade. Trading 100 times decreases the balance $200. Trading 500 times decreases the balance $1,000.
If a chart of your account equity looks like a straight line to zero, I almost guarantee that trading costs are the real issue killing your expert advisor. Costs are the only issue which could account for such brutal consistency, aside from silly examples like using a 2 pip stop loss with a 100 pip take profit.
My first trading account might form an exception. Unlike most traders that never accept losses, I never accepted winners. Maybe I was profoundly greedy, but I always believed that the market had more juice in it. Like clockwork, my initial instincts were right, only to have the market double back and hit my stop loss. I wound up with 50 consecutive losing trades, all held at least one day, over a period of 2 months.
The chances that your strategy never takes profit are pretty minimal, unless you’re an oddball like myself. Trading costs are almost always the culprit.