Megadroid Backtesting - 1% a week

Welcome back Forex Fans. Hope everyone had a great week of trading and is ready for the weekend.

To your left please find back-test results for the Forex Megadroid for the past 10 years tested one year at a time. I tested with a $1000 account resetting back to $1000 at the start of each year. I don't think the account size matters much since the EA calculates bet size based on the size of the account and a risk setting.

For my tests, I used a 0.1 risk setting which risks about 10% of the account value on each trade. That doesn't mean that it will loose 10% on a trade, but that's that starting size for each trade. 10% is a relatively conservative setting. I believe I read on a prior version of the site that they used a 0.3 risk setting to produce the outrageous returns shown on the web site.

So do I believe the historical returns are really possible? Looking at a few of the years, 2000 and 2001 to be specific, its hard to believe this robot is going to return 500% in one year. I don't think MetaTrader was even in existence at that time, and its possible the EA has been optimized to show good back testing results. We know from our earlier coding exercises that the EA knows is in demo mode and its very possible that the results prior to 2005 are just a sham.

So what do I think is a reasonable return? We'll, I've come upon a figure of 1% per week. My forward testing with Megadroid appears that this is possible and some other commercial EA's might also be up to the challenge. So is 1% a week a big deal and should we be excited about that type of return?

Well I put a spreadsheet together and did some compounding. Starting with a $1000 initial investment, over 10 years trading 50 weeks a year, that comes to $144,000. Not bad, but not much of a nest-egg for retirement. If we change that initial investment to $10,000, than it grows to $1,447,728 at the end of 10 years. Now we are talking about some serious dollars and enough to act as the anchor for a nice retirement fund.

Now let's ask ourselves, are these returns really possible? There are whole bunch of reasons why things may not work out this way. Some I can think of:

• The EA stops working as is has historically because the FCM's figure out how to defeat it
• The Forex market is somehow legislated out of existence. The NFA is making some moves in this direction such as reducing leverage to 10% forcing US-based clients to move their accounts to the UK.
• Taxes. If we reduce the yearly take by 30% to cover the capital-gains tax, our $1.4 million is reduced to only $56,000. How's that for depressing? I don't have a solution for that other than to run the process in a Tax-deferred account such as an IRA. I don't think that's possible with a forex account. Let me know if you guys are aware of such an arrangement.

So the taxes are a real drag and kill the compounding potential. Even so, I think 1% a week is a pretty darn good return, about 60% for year with compounding. This beats any other type of investment I'm aware of, but given the drawdown potential (as high as 50%), you can't throw too much money at it and still be able to handle the drawdown.

That's enough for now. I'm looking for some good EA ideas to start coding and I have some leads. Let me know if you have any good ideas and want me to code them.

Thanks and enjoy your weekend,

Chris