Hi David,
What's your opinion on the automated systems that are being advertised all around, is there a reputable system that you could recommend?
Best regards.
Hector

Hi Hector,

Good question as you are right there are a ton of these things being advertised. From my experience the large majority of these systems are, to put it bluntly, crap for several reasons:

1. The performance they advertise is based on something which is known as back testing. Back testing is where you take a set of historical data for a financial instrument and then you test out an idea by seeing how that idea performed over the past several years.

This is all fine and dandy when done correctly however the problem is that with hindsight I can massage the system to generate any returns that I want.

So what many of the system people will do is continue tweaking their system until they show phenomenal results based on historical data and then publish that data as the "indicative return" of the system or in other words as a gauge as how it should perform in the future.

The problem with this is that what happens in the past is only in my, and most other traders that I know, opinion a very general indication of what is going to happen in the future. So for example I can tell if a system performs well in high volatility market conditions vs. low volatility market conditions by looking at historical data. But if a system did 50% over the last year when tested on historical data this does not really tell me anything about what the future performance of the system is going to be.

So with this in mind most of these systems quickly crash and burn from my experience.

2.They are designed to generate commissions and/or rebates for trading flows from the system designer and therefore they overtrade which generally kills performance of any system.

3. They are not designed in a way that can be changed if market conditions change. Most systems which are well designed that I have seen leave room for or have inputs for periods when market conditions change. So for example if the system is built to perform well in periods of high volatility then it will have a component which turns it off or implements another system when the market is in a low volatility environment.

With all this being said there are a couple of products out there that are trying to get around all these things by filtering for good system providers and then only providing track records of signals that are given after the signal/system provider signs up. This at least takes out the ability for the signal/system provider to push back tested results.

Another thing that is interesting is that some of them allow you to alter the inputs of the strategy. For instance if you only want to take the Yen Trades but not the Euro Trades for a specific strategy it will allow you to do that.

One such service that I have played around a bit is Zulutrade. They offer a free real time demo on their site as well if anyone would like to check it out.

Putting money into systems or any sort of managed investments is however in my opinion not something that should be done without being very informed on the topic as there are tons of variables to consider. With this in mind I will be doing a few videos on what to look for when analyzing money managers which you can watch out for in the next couple of months.

Hope that helps. If anyone else has any inputs or other ideas on this one please feel free to post them below.

Best Regards,
Dave

Hi Hector,

David is right - there is a lot of trash out there. I work with systems developers all day and know from experience how rare it is to find something worthwhile.

Here are a few quick pointers to sort through the mess:
-Avoid anything that guarantees or implies positive performance. The essence of trading is taking calculated risk. All trades involve risk, meaning you can lose at any given time.
- Ask how often the system trades. Experience tells me that active day trading systems are far more likely to blow up an account that longer term strategies. The "less is more" concept applies well to trading.
- Find a system whose past performance matches your personality. One of my customers told me a story yesterday about meeting Larry Williams (a famous futures trader) that you may find informative.

Williams said that of the people who purchase his system, maybe 10% of them try following it. Of the 10% who try the system, only 10% of those people will actually use the system for more than a year. The reason? Personality.

This is from a trader who earned millions of dollars trading futures. Experience shows that the strategy works. The problem is that you cannot follow a strategy if you do not have complete confidence in the system or do not feel comfortable placing trades when the system says you should.

Finding a system:
Shaun Overton - InformedTrades
The first place to look is under my thread in "David's Friends." I am currently writing articles detailing the development of a simple RSI strategy. This should give you an idea of the process.

The threads contain an actual strategy and the rules are already available in the posts - feel free to use them in your personal trading. If you would like a free automated system using the strategy discussed in the post, I plan to give it away for free in the next few weeks. The sytem costs nothing, but it only places trades in FXDD accounts where OneStepRemoved.com is listed as the Introducing Broker (IB).

Alternatively, I can put you in contact with systems sellers. Anyone selling systems through OneStepRemoved.com is required to offer a free 30 day trial period without requiring any payment or personal information up front. This allows you to
a) confirm that the strategy works in current market conditions
b) make sure that you feel comfortable with the idea of using the system to trade live money

If you would like a referral, send me a private message or email informedtrades@onestepremoved.com.

Good luck with your search,

Shaun

I have been studying zulutrade and it looks great for diversification, I will wait for your videos about that before jumping in. When I was looking at the performance of some of the signal providers I thought about this:
If they are correct 8 or 9 times out of ten.
Would it be practical to have 10 accounts with 10 signal providers to avoid the risk of blowing one large account in the case of a few consecutive mistakes from one provider?
Thanks again for sharing.
Hector

Hi Hector,

My pleasure. I need to do a little more research into the product myself before I am completely comfortable answer questions with 100% confidence but as I understand it you can have multiple system providers trading on one account. I am also pretty sure that you can control the leverage of each yourself.

So if that is the case then it would seem that you should be able to take steps to protect your account from the scenario you have outlined above by diversifying amount different providers and keeping the leverage low.

Best Regards,
Dave

Hector,

My answer is theoretically yes, but I would exercise extreme caution.

One common statistic traders focus on is the percent accuracy. Consider two examples:

System A averages 20 pips per winning trade and is 85% accurate.
It "only" loses 15% of the time, but each loser is 200 pips. Let's determine how this works out over 100 trades.

85 winners * 20 pips = 1,700 pips gross profit
15 losers * -200 pips = -3000 pips gross loss

System A Net P/L: -1,300 pips
Profit Factor = 1,700/3,000 = 0.56

System B averages 90 pips per winning trade and is 35% accurate. It loses most of the time, but each loser is 30 pips.

35 winners * 90 pips = 3,150 pips gross profit
65 losers * -30 pips = -1,950 pips gross loss

System B Net P/L: +1,200
Profit Factor = 3,150/1,950 = 1.61

Percent accuracy does not tell the whole story. Many traders compare it to a batting average in baseball. If someone bats .330, they are probably one of the top hitters on the team. A lot of promising systems are 35-40% accurate, but most people skip over them.

The ideal solution is to find a trading system with a high profit factor (gross profit/gross loss) and the highest possible accuracy. Anything with a profit factor above 1 has been, but will not necessarily continue to be, profitable.

My understanding is that ZuluTrade's smallest position size is 1 mini lot. If you trade 10 systems and each one trades 8 currency pairs, there is a substantial risk of overleveraging the account. You probably need at least$50,000 or more to trade that many systems. Most new traders do not have that much risk captial to trade. Remember the most basic rule of trading: never risk more than you can afford to lose.

Finally, consider the length of time a system has traded. I would avoid anything with a track record of less than one year. Most high-performing systems are optimized to current market conditions. As soon as the market conditions inevitably change, performance typically collapses. The chances of positive returns are much higher (although far from assured) if a system survives its first year.

__________________
Shaun Overton
OneStepRemoved.com
Strategy and Automated Trading Development