Why Your Algorithm Will Fail

Reason 6: Using Old Technology

Let’s talk about one of the most iconic inventions ever -

The toaster.

You may not recognize this bad boy, but it was all the rage over a century ago.

When the toaster was invented in 1893, people were amazed at its capabilities.
For the first time, people thought “wow, now I can toast my bread without watching!”
which was quite impressive, given the current technological state. Their new cutting
edge toaster technology solved a problem. Fast forward to today, and now we have
toasters which solve all kinds of problems that the initial design didn’t - they pop up
when the timer is done, toast your bread to a pre-defined level of toastiness, or bake
pizzas through giant conveyor belts for commercial businesses...

We even have bluetooth-enabled smart toasters that play music and take verbal
commands! The point is, toaster tech has evolved since the 19th century, alongside
every other area of tech -
 Traders’ tech is no different. From the early 1900s until now, market
speculation technology has evolved quite a bit. We are far and beyond the early days of
hand-jamming Dow theory calculations while shouting “Buy!” and “Sell!” on the busy
floors of the Chicago Mercantile Exchange. Nowadays, we tend to trade from the
comfort of our own homes, with the convenience of smartphones, or with the
ultra-convenience of automated algorithms that require little upkeep - enabling you to
literally trade while you sleep.

Unfortunately, many traders aren’t quite up to date with the advancements made
in the last few years. Some are stuck in 2005, back when “Hollaback Girl” by Gwen
Stefani was a Billboard Top 100 hit song. This was also the year MetaTrader 4 came
out. Feel old yet?

MetaTrader 4 was cutting-edge technology when it came out - just like our 1893
model toaster. But, as markets evolve and edges diminish, we face new problems as
traders: We have to compete with advances in technology that eat up more and
more of that juicy liquidity. The good news is, if you are one of the traders who utilize
newer tech, you have a comparative advantage over those that don’t, which brings me
to the next point -
In trading, there are 3 ways to make money:

1. Outrun the market.

2. Outsmart the market.

3. Scam other traders.

Option 1 isn’t viable for retail traders. High frequency institutional traders spend
millions on the infrastructure required to execute trades at the microsecond level. For all
intents and purposes, their edge comes from outrunning the markets.

Option 3 is morally reprehensible. You should never take money from people unfairly.
If you do, you weren’t raised right. End of story.

That just leaves Option 2: outsmart the market. Since this is the most viable option
for retail traders, we have to create solid trading models to have any chance of
non-random success. In order to do this, we need to use reasonably solid technology
that allows us the freedom to do what we do best: generate ideas that make money.
Peaches and cream, right? Right.

But -

Just how do we create solid trading models? This all leads back to the question
“what are your technological capabilities?” Think about it - to create solid trading
models, you should be designing your back test environment to mirror live trading as
closely as computationally possible. Otherwise - quite frankly - you’re just wasting
your time. If you don’t simulate a live environment in your back tests, you are
personally ensuring that all your back test results are perfectly meaningless.

You know all those disclaimers about past results not being indicative of future
performance? These are necessary because traders so often fail to create accurate
back test conditions, it’s inevitable their trading systems fail. Once you understand how
important this is, you can’t unlearn it.

You need to design your back test environments to reflect live trading conditions.
Staple it to your forehead if you need a reminder. It’s that important.
 To that end, our “Hollaback Girl” MT4 trading platform totally fails at simulating
suitably complex back test environments. It just doesn’t have the capabilities required to
generate a solid trading model. For example, what do you do when you want to test a
strategy on multiple symbols on MT4? Test each one in series and average the results
in Excel? Well, that’s a convenient way of doing things, but also completely
inaccurate. These results are meaningless because averaging doesn’t account for the
profit/loss timelines, which will play a huge part in your live trading. You don’t get to fast
forward a few years and average your results in real life.

Now, imagine trying to simulate multiple assets, multi-currency exposure

management, multiple timeframe analysis, news avoidance, session filtering, floating
spread values and commissions (which are totally ignored in the MT4 strategy tester) in
your Excel spreadsheets.

Yeah - never gonna happen. It’s neither possible nor feasible. Especially with
MT4’s slow, single core technology. So again, your back test results are
completely meaningless if you’re not simulating a live trading environment.

You could go through the nightmare of trying to square the circle with MT4, or
you could just use a platform that supports complex back test simulations, plug in the
correct values, and get a consolidated output of all those variables in a single pass.

So why on Earth wouldn’t you?

And no, MT4 is not going to get better. Here is a quote from the MetaQuotes team
explaining why:

“The architecture was designed under the limitations of a different time, due to
which it is no longer possible to implement new features that should meet
nowadays’ increased requirements of the industry or the brokers’ and traders’
demands.”

(Source: https://www.babypips.com/news/forex-mt4-mt5-platform-20180116)

RIP, MetaTrader 4. There is a light at the end of the tunnel, though.

Introducing: MetaTrader 5.

Contrary to popular belief, MT5 was not meant to be an explicit upgrade for MT4
in its design. Instead, it was meant to introduce more versatility, speed, and reliability as
a standalone intermarket platform. It does, however, happen to solve many of the
problems we encounter with MT4:

- It has a 64-bit, multi-threaded strategy tester, making it optimal for data

processing based on your computer’s specs. What’s the point of having the latest
and greatest processor if MT4 just disrespects it by utilizing just one core?

- MT5 enables you to test/trade up to 21 different timeframes at the same time,

which allows for far more technical diversity than MT4.

- It has a built-in economic calendar, which enables you to access relevant news
information directly from the terminal.

- The MT5 strategy tester allows you to configure commissions according to

broker-specific settings. It also allows for floating spreads, which reflect a live
trading environment. MT4 forces you to use fixed spreads, which do not.

- The MT5 strategy tester allows for true multi-symbol testing. If you’re using a
multi-symbol EA, it will line up the history and track the profit/loss timeline across
all symbols in real time. No averaging - just precision.

- The multi-symbol feature allows for complex functions such as exposure

management and triangular hedging.

In the “Doing Things Manually” article, we explored why replacing your brain with
technology is necessary for accomplishing massive logical tasks. Well, understand this:
old tech is suboptimal compared to new tech for the same reason your brain is
suboptimal compared to any tech - it just can’t solve problems at the same level.
We know that solving problems as a trader means more money in your account, so it’s
easy to see why we should be looking to upgrade whenever we can.

In the words of popular astrophysicist Neil deGrasse Tyson:

“Ever since the Industrial Revolution,

investments in science and technology have proved
to be reliable engines of economic growth.”
 Thanks, Neil. In a nutshell, the push toward MT5 is increasing - and rightfully so.
The benefits are just too good, and the costs of not having them are just too great. So,
what can we do to prepare? If you’re like most MT4 users, your favorite EAs and
indicators are coded in MQL4 and are therefore not backward-compatible with MQL5. If
you’re not interested in learning coding, or you’d just like some structure to start out
with, there’s a tool that should make your life a lot easier: a massive EA builder for
MT5. The best part? There is zero coding required to use it, but you can adapt your
own code to it if you wish. It’s the Swiss Army Knife of advanced EA builders.

Introducing: Stochastic Market Analysis Reticulation Technology, or SMART, by

Traders Tech.

SMART literally means “technology which captures

and interconnects random market data.”

Pretty cool, right? SMART represents a new class of

technology available for the MetaTrader platform, and it
allows you to take advantage of the best features MT5
has to offer. As such, this program was created in the
interest of simulating the most flexible, realistic back
test environments possible.
Some features of SMART include:

- Concurrent multi-symbol operations. Test/trade up to 72 symbols at once, with

profit/loss timelines accounted for in real time.

- Fully customizable indicator logic options. Explore hidden possibilities you

may not have before, including slope, convergence, zone-based logic, and more.
Everything is assignable to Entry, Confirmation or Exit logic.

- Intuitive custom indicator integration. Seamlessly test/trade your own custom

indicators with all the logic options available in its class.
- Advanced performance metrics. Evaluate systemic performance with metrics
such as Pearson’s Coefficient of Correlation (R) or CAGR/Mean Drawdown.

- News filtering. Avoid news on a time/priority basis. This function keeps your
optimizations clean and works alongside multi-symbol operations.

- Multiple timeframe analysis. Integrate multiple timeframe confluence into your

systems with any timeframe offered by MT5.

- Seasonality filtering. Hone your system’s edge by taking advantage of session,

weekday, or month-based performance. This function filters and displays trading
times based on your preferred settings.
 - Spread filtering. Conserve your account balance by trading at the best prices
available from your broker. This value can be defined based on fixed points or a
percentage of price for each and every symbol selected.

- Currency-specific exposure management. Never find yourself over-exposed

again. Tune into your strategy’s maximum allowable exposure or avoid
correlation altogether.

- Flexible risk management. Customize your SL/TP placement, position size

method, scale in/out metrics, trailing stops, and more.

- NNFX rules. All NNFX rules are included as optimizable inputs. Push NNFX to
its limit with quantitative testing.

- All features work in back testing and live trading. Yes, even news filtering.
Remember, reproducing a live environment should be the standard. Enough said.

Moving to another platform can be quite daunting, so the SMART development

team has set up a community Discord channel for MT5 support and collaboration. You
can try going at this alone, or you can take advantage of the structure available to you.
The choice is yours.
Join the SMART Traders Discord group:

https://discord.gg/5Wq8pKSPzT

SMART is available at:

https://smarttraderstech.com/

A closing statement:

While advanced technology is a great hedge against evolving market conditions,

you need to understand that it won’t solve all the other reasons an algorithm will fail
alone. Instead, realize that upgrades in technology should help you perform the most
important part of trading more efficiently, which is why your algorithm will succeed -
doing the work.

As you strive to become a better trader, you will become sharper, wealthier, and
more experienced. You will find new ways to use your tools, which will allow you to
refine your systems to increasingly simpler levels. Back testing is a complex science,
but systemic simplification should be your goal. Never forget that.

Evolve your trading.

Aaron V.