During the gold rush many people made money, a lot of money, but most of the money was not made by the gold diggers themselves. It was made by the government who sold the licenses to the diggers to allow them to dig and by the stores who sold picks, spades and gold pans. The forex industry is no different. The brokers make money off the spread and then there are the numerous sellers of education services, signal services and last but not least “expert advisors”.
Forex Funnel
This blog entry was going to be a review of “Forex Funnel“, but the more I dug into this product the more I learned about the expert advisor industry. But, before I talk about the industry, I will look at Forex Funnel.
Forex Funnel is a metatrader 4 (MT4) Expert Advisor (EA). If you read their website you will see bold claims. They then present a backtest result over a four year period where you could theoretically have made over $462,000 from $50,000. They achieved this result with a mere 15% maximal drawdown and what is more interesting is they present a back test equity curve which is so smooth it is almost at straight line.
In addition to this they presented a forward test result where they also showed a $12K profit in little over a month and a half in live trading. With a result like that, I was intrigued. So I shelled out $137 for this marvelous money making machine. With a result like that it was worth a deeper look. I know you should better and to never buy systems on back test results and a paltry month and a half of forward testing, but hey even if it was a scam, I have spent more on really bad trading books, so I was bound to learn something. What’s more they have a 60 day money back guarantee, so I could always “try” and get my money back.
Anyway, I signed up and downloaded my new EA. Compared to other commercial EAs , forexfunnel is quite weak. The documentation was pathetic. It was a few pages describing how to install it. There was not discussion of how it works, how you should manage risk, position size, strengths, weaknesses, etc, etc. The EA itself provides very few settings. You can set up the starting lot size and what days you prefer to trade. That is about it. Compared to other commercial EAs where you have much more control, the settings on this are just as appalling as the documentation. In terms of support, they provide you with an email address. There is no online forum discussing the EA and how to use it.
I thought I would test out support, so I emailed them and asked them a couple of questions. One of them was “the documentation seems really scant. Is there any more documentation?” . To which the response was: “We have purposely kept the instructions short as longer ones were tending to confuse epople.” Oh Dear. I new I was in for trouble. Hey at least the nice anonymous person answered my question.
After successfully managing to install ForexFunnel on my system, I set about undertaking a series of back tests to see if I could reproduce their results. The first one was around reproducing their 4 year result.
So far so good. I managed to reproduce their result. Perhaps this system isn’t a complete scam? After looking more closely at the statistics, most of my results were the same, but with two exceptions. The forexfunnel website’s maximal drawdown was 15% and the relative drawdown was 49.33%. My result had a maximal and a relative drawdown closer to 67%.
This peaked my curiosity. I reran a back test on their forward test results and managed to reproduce their results as well. However, when I extended the time frame out to today’s date, forexfunnel wiped out more than 80% of a 50K account in a couple of months:
I went back to the email support and asked them to please explain. The nice anonymous support person at the other end explained that I needed to use 200:1 leverage in order to keep the drawdown to a minimum on the account. I was using a 100:1 leverage on an Alpari demo, so naturally my maximal drawdown was much higher.
I started to wonder why the drawdown was so extreme. Given the pathetic nature of the documentation, I certainly was never going to learn an answer to that question there.
The answer to that question is in the near linear shape of the equity curve. If you sit down and read your way through the log of the trades and look at the same trades on the screen, what you can see is the following:
What the system seems to be doing is bracketing the price action with long and short orders with tight profit targets and wide stops. This ensures a steady flow of income and an almost straight equity curve. However, the problem with such systems is eventually you build up a number of open positions which are free floating because the original order was hit, but neither the profit target nor the stop loss was hit. This is where you incur the drawdown.
In reviewing the order history, there seems to be a martingale money management system in place. For example, you can see that while the original position size is set to 0.4 lots, the number of lots progresses up to 264 lots in a mater of a couple of months. Presumably the system is using the martingale approach to cover up for the risk of a big hit. In reviewing the orders, there is also something weird happening. The system constantly seems to be moving stop losses around. I presume this is also a way of preventing a big hit on the account.
As you should know, martingale systems are a test of who has the deeper pockets: you or the market. You are effectively taking a gamble that things will be fine and you can close out your orders and take your small profit before the market hurts you bad (LTCM style). The problem with the 2 month test is as you can see, the trader is left holding some nasty positions for almost 2 months. The back test was ended and all these positions were called in, creating an 80% loss.
The reason why the nice anonymous support person said to use 200:1 leverage was obviously to ensure the depth of your pockets. The problem with this approach is that most brokers will not allow 200:1 leverage on accounts bigger than 100K as it puts them at a big risk. At more than 250K they will often put you on 25:1 leverage. So while, the 4 year back test is theoretically possible, there is now broker out there that will let you swing such a big line. Also you would have to have balls of steel to trade this system, as you will be carrying some very nasty drawdowns for months if not years.
The Expert Advisor Industry
In preparing the review of forex funnel, I naturally tried to google other sites and find out what others are saying about this system. There was certainly a lot of content out there, but very little of it seemed to be unbiased content. Every review I read was high level and espoused the same selling points that the forexfunnel website espouses. It was at this stage the penny dropped, All of this content is manufactured to help provide links and positive reviews for forexfunnel. This is basically a search engine optimization (SEO) strategy to ensure the website ranks highly in google. What few links there are from independent blogs and sites are via click bank, which pays off the blogger with revenue sharing for every sale.
Next, if you look at the forex funnel web site, you see it is quite professionally constructed, complete with nice graphics, interviews with actors, etc. Lastly, if you look at other product sites, such as Forex Tracer, Silicon Forex, etc, all of these sites follow the same formula: a back test with a near straight equity curve, pretty graphics, interviews with actors, heaps of cross links from other sites.
What I hope you can see is a pattern emerging. These sites are manufactured. Their objective is to sell volume licenses. They might spend 10K on getting this site set up, and if they can sell a thousand licenses for the EA before the word gets out that the system stinks, they have made a 90K profit. What these guys are doing is a valid money making strategy.
The whole manufactured site thing doesn’t really bother me. And to be frank a $137 is a small price to pay. What pisses me off with this whole thing though is there is probably some poor schmuck out there who will put his hard earned money into this system and may get bush whacked with a 60 - 80% loss on their hard earned trading capital.
Moral of the Story
Estee Lauder once said that:
“If a man with experience meets a man with money, pretty soon the man with the experience will have the money and the man with the money will have an expereince”
Well, I have certainly had an experience and now I am $137 down. Spending a $137 on a dud system is part and parcel of the trading learning process, so I am not too disappointed. To my handful of readers out there, please please please don’t risk your hard earned trading capital on any system until you done a decent amount of research on it.
Anyway, I have asked for a refund on forexfunnel. Lets see if the nice anonymous support person will help me get my money back.
