In an age of extreme market volatility, broken financial paradigms and collapsing financial structures, there are still those who lead the capitalization of these circumstances with substandard and appallingly useless provisions.
Think Forex Signals, and then think “bots” and “expert advisors”.
According to the United States Commodity Futures Trading Commission (CFTC), the U.S. government agency that regulates commodity futures and options markets in the USA, there has been a dramatic increase in forex trading scams in the last 5 or 6 years, and the expectation definitely is that the number of scams will keep rising as more and more investors discover the Foreign Exchange market.
These bot-creating software vendors have somehow taken it upon themselves to perpetrate the notion of “success” with trading forex through bots and expert advisors, and branding it as comparable to algorithmic trading (a COMPLETELY different paradigm altogether).
The title of this narrative says “Is This INSIDER TRADING??” – If you’re wondering what the correlation between what’s been said so far in this article, and this title, is, then keep reading attentively to find out.
Appropriate branding of investment technology like algorithmic trading is partly to blame (and bot creators have wasted no time in pouncing on it).
Because a loose definition of “algorithmic trading” prowls the forex market, what is supposed to be a means for large institutional investors to transact large volumes of shares whilst obtaining the best possible prices for their chosen stock, forex pairs and other contracts, without impacting the market, ill-informed forex traders have been swept up in the thousands over the years into associating algorithmic trading with bots and expert advisors, consequently losing millions of dollars at the hands of poorly written software packages (bots) that have been allowed to trade accounts independently, using the simplest implementation of back-testing and pattern recognition technology possible.
What a disaster, and an expensive one at that.
Granted – Algorithmic trading is by no means a pure science, and is prone to mass inaccuracy and constant modification, but its purpose has been misinterpreted for absolute ages, and inappropriate representation at the hands of devious bot creators has worsened matters even more.
Granted – It is next to impossible to entertain the notion that algorithmic trading has improved the world’s capitalist system by trading in microsecond timeframes in an attempt to capture the best share prices, a strategy based around hard-coded rules fathomed by the end-users of these systems (the institutional investors).
Supremely Granted – Algorithmic Trading DOES NOT and IS NOT CAPABLE of taking into account the fundamentals and structure of any market, at any given time. It is purely a mathematical science – Do “this” when “this” is the case, Do “that” when “that” is the case.
A misinterpreted, misrepresented brand goes a long way in engraining the wrong idea in the minds of those exposed.
Such is the case with forex traders and their widespread exploitation by forex scams such as bots and expert advisors – software programs purported to have an “algorithmic trading” aspect - that can serve as “set and forget systems”.
Creators of these bots and expert advisors know first-hand, that the illusion of being able to trade without spending copious amounts of time is a very attractive one, one that forex traders wish day in and day out, they could live.
In essence, bots and expert advisors are merely software programs designed to hypothesize future trades based entirely on basic statistical analyses of old forex data. They have a hard-coded back-testing or pattern-recognition based rule-set that DOES NOT and CANNOT entertain any fundamental market indicators, making them extremely DANGEROUS to run on everything from a crawling, nearly-asleep market to a volatile one of the likes of what 2011 presented.
If the use of principal back-testing could have alleviated not only the concerns but also the reality of market collapse, if the use of old deprecated data in the foreign exchange circuit could have allowed for anyone even remotely interested in the financial markets, to see into the future and add a degree of automation to their trading, then the world would be a very, VERY different (much richer) place today, the US wouldn’t have an astronomical trade deficit, China wouldn’t own majority stakes in many industrial nations and the EU would be the most well-off entity on the whole planet.
If forex bots and expert advisors were the key to mass-capitalization of falling economies, then we wouldn’t have had a single depression, a single recession, and been blessed with all-sustaining, ever-green, ever-rich financial markets.
If forex bots were capable of executing highly accurate forex trades as they claim they do, with even a 0.01% degree of accuracy, then institutional investors would drop out of bond markets, major corporations would never hedge their trade risk again, capital flow between countries would cease to exist and everyone would be sitting on their workbench over a cup of coffee and donuts, watching a now non-existent forex market.
Please do pardon the sarcasm.. Unfortunately, there is no better way to express this issue.
From a statistical perspective, the use of back-testing (put on a royal pedestal by Forex Bot creators) has almost never been proven to predict future movements over short, medium or long-term timeframes, and is hence a DANGEROUS tool if used as the ONLY tool in a financial trader’s arsenal.
In essence, forex bots are always perpetrating the notion that fundamental analysis has no influence on technical analysis, that the forex market is somehow linear in modality and that the mining of redundant data can somehow create the perfect future trading strategy.
Back-Testing & Pattern Recognition – The primary foci of these forex robots - are merely tools for validating a given trading strategy against a reasonably stable timeframe that hosts consistent data patterns in the forex (or other financial instrument) market and NOT one with:
1. An Italian Crisis,
2. A Spanish Crisis,
3. A Greek Crisis,
4. A French Crisis,
5. A British Crisis,
6. Political uprisings in atleast 3 countries worldwide,
7. Devastating earthquakes,
8. Country-wrecking tsunamis,
9. Sinking cruise-ships,
10. Exploding oil-rigs,
11. Multiple Wars on Terror consuming Multiple $Billions,
12. And an overwhelming reason to believe that Europe’s Single Currency may soon embark on a road to re-nationalization and political restructuring in Europe..
… among other things.
Yet we see more and more forex traders resort to massaging their desire for a less hectic trading experience, less immediate accountability to their trading decisions (or none at all), making tracks towards the use of automated forex trading robots (“bots” or “droids” as some are called).
But one is forced to ask the all-consuming question:
“What on earth could compel forex traders enough to make their otherwise reasonably mathematical judgement sway in the direction of an all-encompassing fraud?”
The answer is:
Lust - ladies and gentlemen. The lust for quick profits and an even greater lust for the “perfect trading system” that allows traders to step away from the painfully hectic pace of their world.
Unfortunately for 9 out of 10 traders, this dream can never be a reality if bots are the means resorted to.
Having said that, there have been advancements in the field of data analytics over the past couple of years, advancements fuelled by the madness that is social media, or social networking in general actually.
Consider eToro – one of the few fairly popular Forex Brokers out there today.
eToro launched the CopyTradertm project, a web-based platform whereby traders could copy other traders’ positions on the forex market, but only if they use the eToro platform to trade.
The focus: Social proof, instead of statistical analysis.
The result: Traders validating their positions using other traders’ positions, only placing trades that are proving to be profitable.
The advantage: Temporarily verified, profitable trading positions, available to all those who wish to copy them and open the same profitable positions of their own.
The DISADVANTAGE: A very small sample of traders to choose profitable trades from, A.K.A. the eToro community only. For example, if there are 50 traders placing a trade that is proving to be profitable right NOW, odds are that other CopyTradertm users will copy that trade and open a position straight away.
However, if all 50 traders are wrong – which is highly likely given that 50 is a very small and statistically insufficient sample – all traders (including those placing the trades, and those copying them), fail, and lose money, sometimes a LOT of it.
The question one asks is:
“If statistical significance is the underlying issue – which it is – then scaling this whole trade copying business to larger numbers, e.g. evaluating the profitability of a trade based on say 5,000 traders placing the same trade profitably, would solve the problem wouldn’t it?”
Yes. And there is a source, a place where many thousands of traders hang out every day, sharing their trading positions, strategies, wins and losses, all day long.
Infact – Large corporations and Hedge Funds have been spending millions of dollars annually in an attempt to adequately mine the information available through this source.
And if you’re wondering what the source is, it’s sitting right under your very nose.
The source is:
The Twitter and Facebook Social Networks.
Does a sample of 5,000 to 20,000 traders’ feedback on a particular forex pair’s performance at a given point in time, seem trustworthy feedback?
Realistically, yes again.
Sampling data from a combined social member-base of over 1.5 Billion Users, of whom perhaps 50,000 to 100,000 are traders or people with a self-proclaimed interest in forex trading (according to Facebook Ads, this figure – taken today on the 18th of January, 2012 - varies between 60,000 to 90,000 active forex trading enthusiasts on Facebook alone, spread out over the USA, UK, New Zealand, Australia, Canada, China and Singapore)
And when you bring in the active trading community on Twitter, this number increases even further to between 150,000 to 300,000 active trading enthusiasts on these two social networks combined, at any given time.
What is the point of saying all this?
Social Proof in the present is more powerful than statistical proof based on what’s happened in the past.
Forex trading positions validated through social media in the present, take not only technical indicators into consideration, but also the underlying fundamentals of the markets, in the present.
In a nutshell, tens of thousands of traders going LONG on the EUR/USD at 1.3126 for example, is a very powerful little piece of information for any forex trader to have.
Back in the day, they called this “insider trading”. Does that definition even count anymore, now that we have social media forming such an integral part of day to day communications worldwide?
Is mining social networks for this data, data that could potentially allow independent traders to transact a large number of positions on a particular currency pair in a short span of time, possibly threatening to the institutional investors and large corporations gearing a majority share of the market?
Based on size, no, based on strength of insight, advance knowledge of market continuity, definitely yes.
Why else would hedge funds be spending millions researching technology that can achieve this target.
Has someone or some company already made inroads into mining social data for profitable forex trading positions?
There may be a few out there, but one with a clear intention to launch their technology breakthrough very soon, is ITM Financial, a company specializing in not only Financial Analytics but Text Analytics as well, a powerful combination that has allowed it to furnish a first attempt at releasing a Social Data Mining Platform specifically targeted at the Forex Market, a software engine that taps into the billions of social conversations that take place on Twitter and Facebook every day, and analyses the profitability of a number of currency pairs, in real-time, over a 24-hourly cycle.
In a nutshell, ITM Financial can predict highly accurate Entry/Exit Prices, suggest appropriate Stop-Loss and Limit Order values, taking information from hundreds of thousands of traders on these social networks, and amalgamating it with sentiment on the markets based on news, market feeds and technical analyses from across the globe.
Technical and Fundamental Indicators, combined with Social Proof from a LARGE base in the Twitter and Facebook Social Communities.
Without a shadow of a doubt.
Without a shadow of a doubt.
RISK DISCLOSURE: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.