How to Differentiate a Profitable Trading Robot from an Unprofitable Trading Robot
Nowadays, robots are increasingly becoming popular in the trading world. That’s because robots or automated trading software can perform trades faster and more accurately than humans, making them very appealing to traders who want to profit.
The algorithmic trading industry, according to Technavio, is expected to increase by $3.79 billion between 2021 and 2025, with a compound annual growth rate (CAGR) of over 6%.
However, not all robots are created equal. Some robots are more profitable than others, and some may even be unprofitable. It can be too unfortunate to purchase a trading robot that ends up losing you money instead of making a profit. It can be difficult to differentiate a profitable robot from an unprofitable one, but with some research, it can be done.
In this article, we will discuss some tips on how to differentiate a profitable robot from an unprofitable one. We will cover the different factors you should look at when assessing a robot’s profitability, as well as how to determine a robot’s risk-return ratio and differentiate a profitable robot from an unprofitable one.
8 Factors that Differentiate a Profitable Trading Robot From an Unprofitable Trading Robot
When assessing a robot’s profitability, there are several factors you should look at. Here are some of the most important factors:
1. Past Performance
One of the most important factors when assessing a robot’s profitability is its past performance. Therefore, you should always research how well a robot has performed in the past before investing in it. You can do this by looking at historical data or even contacting the robot’s developer to inquire about its past performance.
Some developers even offer a money-back guarantee if a robot does not perform well in the future. When checking the historical data, look at the length of the data sample, the win rate, and average profit per trade. The longer the data sample, the better. Also, compare the win rate and average profit per trade of different robots to see which one performs best. This will give you a good idea of which robot is the most profitable.
To get an even better idea of a robot’s past performance, you can also look at its live trading results. This will give you an idea of how the robot is currently performing.
In its recent article, Tradingtact suggests that instead of establishing a minimum acceptable number of trades, you consider using the standard error to quantify your backtest’s uncertainty arising from a small sample of trades.
The author explains why having enough backtests passed is crucial when choosing a trading algorithm on a big marketplace like MQL5 — the more, the merrier.
MQL5.com is a trading robot marketplace that allows you to buy and sell trading robots. It was created by the MetaQuotes company in 2010 and has since become one of the most popular platforms for buying and selling trading robots.
Before purchasing a solution on MQL5.com Market, you can see the performance data and conduct some background checks. You can filter the list of trading robots, indicators, and trading applications
— by price, performance, or other criteria. Once you find a robot you are interested in, you can click on it to get more information.
Each robot has its page with information about the developer, the trading strategy, backtesting results, etc. You can also find user reviews and ratings on each robot. The market also allows you to download a demo version of the trading solution of interest, which you can test at no cost.
2. Robot Type
Another factor to consider when assessing a robot’s profitability is the robot’s type. There are two types of robots, discretionary and mechanical. Discretionary robots are programmed to make decisions independently, while mechanical robots follow a set of rules that the user predetermines.
Generally speaking, mechanical robots are more profitable than discretionary robots, as they are less likely to make mistakes. However, this is not always the case, so it is essential to do your research before investing in any robot.
3. Strategy
The type of strategy is also an essential factor to consider when assessing profitability. There are two main types of strategy, trend following and mean reversion. Trend following strategies aim to profit from long-term trends, while mean reversion strategies profit from short-term price movements.
Basically, trend-following strategies are more profitable than mean reversion strategies. That’s because trend-following strategies capture larger price movements, while mean reversion strategies only capture small price movements.
Unfortunately, nothing is constant in the financial market. Therefore, investors should always consider adjusting their trading strategies based on the market state and world situation. COVID pandemic is a perfect example of a black swan that affected any (even good) trading strategy for algorithmic trading.
Harvard Deusto Business Research conducted a particular trial to estimate if it’s possible to predict the news and apply the corresponding fixes to the trading robots — based on Gómez-Martínez’s “Risk Aversion Index” findings.
Through an econometric model, he shows that Google Trends provides relevant information on the growth of financial markets and may generate investment signs that you can use to predict the development of major European stock markets.
Therefore, could this indicator be valid to measure the fear of COVID-19 and thus anticipate the evolution of the financial market? According to this approach, HDBR proposes an algorithmic trading system that issues buy and sell orders by measuring the level of aversion to risk, in this case, measured by the confirmed cases of Covid-19.
4. Risk-Reward Ratio
Another essential factor to consider when assessing a robot’s profitability is its R/R ratio. This ratio measures how much risk a robot is taking for every dollar it aims to make. A higher risk-reward percentage means that the robot takes additional risk for every dollar it seeks to make.
While a higher risk-reward ratio doesn’t always mean that a robot is more profitable, it’s generally an indicator of profitability.
In a nutshell, the R/R ratio is calculated using the following formula:
However, according to the “Long/Short Market Dynamics: Trading Strategies for Today’s Markets” book by Clive M. Corcoran, some traders and investors use the opposite — Reward/Risk formula — targeting a ratio greater than 1.0. The higher the number, the better.
5. Win Rate
Another important factor to consider when determining a robot’s profitability is its win rate. The robot’s win rate is the percentage of trades it wins. With a higher win rate, the robot is more likely to profit.
However, it’s important to note that a high win rate does not always mean that a robot is profitable. That’s because you can achieve a high win rate by taking more risks. Also, it would help if you looked at the win rate in conjunction with the risk-return ratio to understand a robot’s profitability better.
According to Corry Mitchell @ The Balance, you should aim for a win rate of 50% to 70%, a win/loss ratio above 1.0, and a risk/reward ratio below 1.0.
6. Average Profit Per Trade
The average profit per trade is another important factor when assessing a robot’s profitability. It’s the average amount of money that the robot makes on each trade. A higher average profit per trade means that the robot is more likely to be profitable.
However, it’s necessary to note that you can achieve a high average profit per trade by taking more risks. Therefore, you should look at the average profit per trade and the risk-return ratio to better understand a robot’s profitability.
7. Auto Trading or Manual Trading
Another factor to consider when assessing a robot’s profitability is how you trade it. There are two types of trading, auto trading and manual trading. Auto trading robots are programmed to trade automatically, while manual trading robots require users to trade manually.
Generally speaking, auto trading robots are less profitable than manual trading robots. It’s because auto trading robots are more likely to make errors. However, this is not always the case. Hence it’s essential to do your research before investing in any robot.
8. Platform
There are two types of platforms, proprietary and third-party. Proprietary platforms are programs developed by the robot provider, while third-party platforms are programs that third-party providers develop. Proprietary platforms are less profitable than third-party platforms.
Proprietary platforms are not as widely used as third-party platforms, which means less liquidity. This can lead to higher costs and slippage. However, this is not always the case, so it’s essential to do your research before investing in any robot.
Summary
When assessing a robot’s profitability, it’s important to consider the main factors: the type of strategy, risk-return ratio, win rate, average profit per trade, and auto trading or manual trading. These factors can help you determine whether a robot is likely to be profitable or not. When assessing a robot’s profitability, it’s also important to consider other factors, such as the platform.
MQL5.com is a community of developers and traders who create and sell trading robots. It’s a great resource to find a trading robot or a developer to create a custom trading robot for you. The community is active and has a lot of resources, such as forums, articles, and videos. This resource is a good ground to start looking for an algorithmic solution for your strategy.
