If you must buy a trading system...

[tss42]

There is nothing wrong with buying a system, as long you know what you are getting into and what to expect. We are talking about end of day systems only.

Checklist:
1. Is the system fully disclosed or a black box? Don't bother if it's a black box because you'll ditch it as soon as you hit a few losses.

2. Is it completely mechanical or does the seller claim to use his/her 'feel'? Don't bother if it's the latter. Assuming the seller has indeed developed a 'feel' of the market and is not lying, what makes you think you can develop that as well?

3. Ask the seller if he/she trades it everyday. Don't bother if they don't. If they trade it, for how long have they been trading it?

4. Ask where the seller's main income comes from: trading, selling courses, or some other source?

5. Ask if the seller will show you an audited account statement (hiding confidential information like their broker account number etc) over a period of 6 months, taken within the last year. Getting an account statement doesn't imply you are on to a winner, but it's better than none. This single question will weed out most of the scammers (except the serious crooks who happily falsify account statements).

6. If you have met the seller on a forum, ask for the names of a few other customers on the same forum, so you can contact them. Check when these members have joined the forum.

7. Find out what market it trades, using what vehicle, how often, which side (long, short, both), how much capital is needed to operate the system, how much time it needs every day, and (very important), if this is a one-sided system, i.e. trades only on the long or the short side then see what sort of market the system has had recently. In other words, long-only systems pop out of every corner in a roaring bull market, only never to be heard of again in a bear market. Don't get caught in th hype.

8. Get all the vital statistics, from real trades, not from simulated back tested results, both historical and for each year:
Number of winners v. losers
Average profit to average loss
Net ROE for each year
Compounded cumulative ROE since the beginning
Maximum historical drawdown
Maximum drawdown each year
Number of winning months v. losing months each year

9. Get the equity curve of the system (of real trades, not of simulated back tests).

10. Find out the conditions of refund. Most mechanical systems will have a 6-months or 1-year no-profit guarantee, i.e. if you follow the rules, log all your trades for that period and can't show a profit then you get your money back. This is why it's important not to buy a system based on the seller's 'feel'. You'll never get your money back.

If at any point of this questioning the seller gets a bit shirty and starts talking about 'trust' or 'honesty', simply walk away. If they cannot provide answers to straight question, they don't deserve your cash. There are plenty of fish in the pond.

Once you have done all the due diligence and are happy that you can handle the drawdown and the losses, go for it.

Once you start paper trading the system, chances are the system will go straight into a drawdown, completely against what the seller has told you so far. One thing you should never do is to give up at this stage and try something else. There are two reasons for this:
First, you never get your money back if you give up.
Second, the extended periods of drawdown are extremely useful to build you as a trader. What makes you think you'll not have a drawdown when you finally trade profitably? This tough period prepares you for that, so thank your stars that you are getting that opportunity before actually burning any real money. In addition, these losing periods tells you a lot about the system you are testing, why it is not performing, what is missing etc. All this information is useful. After all, it's not stopping you from trying to find your own system and paper trade it in parallel.

 

[westernforce]

Good post. People are way too quick to trust sellers of promised systems.

 

[Directional]

better still. trade on sim and develop your own system without ever having to lose money OR buy someone else's dubious system.

 

[wasp]

better still. trade on sim and develop your own system without ever having to lose money OR buy someone else's dubious system.

unless its one of mine... There bargains! :cheesy:

 

[shadowninja]

Mine isn't a bargain but you do get magical weapons. What other trading system offers you magical weapons?

 

[Mathemagician]

5. Ask if the seller will show you an audited account statement (hiding confidential information like their broker account number etc) over a period of 6 months, taken within the last year. Getting an account statement doesn't imply you are on to a winner, but it's better than none. This single question will weed out most of the scammers (except the serious crooks who happily falsify account statements).

Unfortunately, this also weeds out those who are in compliance with the NFA, who frown upon the use of actual statements. As a substitute, I would insist on speaking with existing clients regardless of whether or not they are on a forum. I would also insist on speaking with a broker who executes the system.

Otherwise, pretty solid set of questions for a system vendor to answer.

jj

 

[dbphoenix]

"There is nothing wrong with buying a system, as long you know what you are getting into and what to expect" followed by 11 buts.

Those who would learn how to trade avoid developing their own strategies as if they were avoiding smallpox. Why?

 

[Mathemagician]

A suggested addition...

You should also ask whether the vendor is registered with the relevant regulatory body in their jurisdiction. For example, here in the US trading system vendors are required to register with the Commodity Futures Trading Commission (CFTC) as a Commodity Trading Advisor (CTA) and notify the National Futures Association (NFA) of their status as a CFTC-registered non-member CTA. Any vendor who tells you that this is not required is misinformed or lying, and any vendor seeking to avoid legitimate registration has something to hide.

jj

 

[tss42]

Those who would learn how to trade avoid developing their own strategies as if they were avoiding smallpox. Why?

How do people learn to drive a car?

 

[nine]

Do they learn to drive a car by riding in a Taxi?

 

[tss42]

Do they learn to drive a car by riding in a Taxi?

No. The ones I know have learnt from someone else, usually in exchange of money.

But hey, what do I know?

 

[nine]

The point is that trading other peoples' systems will teach you about trading other peoples' systems (riding in taxis will make you good at riding in taxis). And that's just a tiny part of mastering trading just as riding in taxis is a tiny part of learning to drive (whether you paid to learn or achieved it by some other means).

On the other hand I think your post was a good analysis of "how to trade other people's systems" having personally buried over 50,000 in a black box before I gave up and started learning to trade.


Edit: And lets be fair: you did say "if you must" after all.

 

[Mathemagician]

As a trader, I definitely understand the resistance on the part of those who already are successful traders to using someone else's systems. The thing is, there are people who do not want to learn to daytrade and they have lots of good reasons. Often they want the diversification available to daytraders as most often daytraders are uncorrelated to pretty much everything yet understand that their time is more effectively spent doing what they do best (e.g. running their business or performing their full-time job). They also do not want to commit the relatively large amount of capital usually required to open a managed account with a successful daytrading CTA. For these people, trading someone else's systems through a managed systems broker makes a lot of sense and many folks do successfully accomplish their goals in this manner.

jj

 

[dbphoenix]

For these people, trading someone else's systems through a managed systems broker makes a lot of sense and many folks do successfully accomplish their goals in this manner.

jj

A thoroughly objective reply from a managed systems broker

 

[temptrader]

very interesting, let me go through this one by one . . . .

There is nothing wrong with buying a system, as long you know what you are getting into and what to expect. We are talking about end of day systems only.

I don't think it matters if it's end of day or not, a system is a system to a lot of people.

Checklist:
1. Is the system fully disclosed or a black box? Don't bother if it's a black box because you'll ditch it as soon as you hit a few losses.

Black box means that the seller has something to hide. If you don't know what's behind it, you are at it's mercy. Also what happens if the software needs upgrading or something changes or they announce an improvement etc. . . omnitrader do this crap all the time . . .

2. Is it completely mechanical or does the seller claim to use his/her 'feel'? Don't bother if it's the latter. Assuming the seller has indeed developed a 'feel' of the market and is not lying, what makes you think you can develop that as well?

If he/she uses her/his own "feel" then the point is void and null. You might as well talk gibberish then.

3. Ask the seller if he/she trades it everyday. Don't bother if they don't. If they trade it, for how long have they been trading it?

I don't get this: if he/she trades it everyday why sell it to anyone? Nobody gives away money for free (apart from charitable organizations and the odd anomalies here and there). Or else they could be using you as their guinea pig so they feel that you're part of the experiment too . . . Only those that sell something like this have a deep insecurity about the system itself.

4. Ask where the seller's main income comes from: trading, selling courses, or some other source?

I can nearly 100% guarantee that anyone who sells systems never do full time trading to consistent profitability. In the same vein that van Tharp/Elder and other such authors writes books about trading psychology, but CANNOT trade. If they could trade they would, instead they have elaborate websites and organize expensive seminars to lure the unwary. They harp on and on about the same things over and over again, and for some strange reason they proclaim that they're "gurus" LOL!!!

5. Ask if the seller will show you an audited account statement (hiding confidential information like their broker account number etc) over a period of 6 months, taken within the last year. Getting an account statement doesn't imply you are on to a winner, but it's better than none. This single question will weed out most of the scammers (except the serious crooks who happily falsify account statements).

You know photoshop is pretty good at making bogus reports. So too is the one long and one short trade on the same stock done to get massive cheques from spreadbetting companies? Those who make big money trading would spread their accounts over different brokerages and do some other minimal tax maneouvres. And if you were making that much money you won't be shouting to everyone about it!

6. If you have met the seller on a forum, ask for the names of a few other customers on the same forum, so you can contact them. Check when these members have joined the forum.

Trusting other's judgement for them would be totally stupid. If you can't do your own research and decide for yourself you have every right to be conned. That was me many years ago. . . . Anyone's cousins/uncles/nephews can make bogus references as to how great the person is. Some people just say nice things at the beginning but it's a different picture later on.

7. Find out what market it trades, using what vehicle, how often, which side (long, short, both), how much capital is needed to operate the system, how much time it needs every day, and (very important), if this is a one-sided system, i.e. trades only on the long or the short side then see what sort of market the system has had recently. In other words, long-only systems pop out of every corner in a roaring bull market, only never to be heard of again in a bear market. Don't get caught in th hype.

Again, do your own research. But then, we are assuming that the person selling is honest? Why should he be, what's in it for him to be? He can give you even more BS in the process to confuse you.

8. Get all the vital statistics, from real trades, not from simulated back tested results, both historical and for each year:
Number of winners v. losers
Average profit to average loss
Net ROE for each year
Compounded cumulative ROE since the beginning
Maximum historical drawdown
Maximum drawdown each year
Number of winning months v. losing months each year

9. Get the equity curve of the system (of real trades, not of simulated back tests).

Statistics, equity curves etc. . . mean nothing. That is in the past and has already past. If the seller of the system can guarantee you the future, why would he need to sell to you? If you want to talk about statistics then by the strong law of large numbers there is no such thing as a maximum draw down. It is a trivial corollary that if there is a chance of a draw down, there exists the a chance of having your entire account wiped out. They don't tell you that because it's not palatable. . .

10. Find out the conditions of refund. Most mechanical systems will have a 6-months or 1-year no-profit guarantee, i.e. if you follow the rules, log all your trades for that period and can't show a profit then you get your money back. This is why it's important not to buy a system based on the seller's 'feel'. You'll never get your money back.

You never get your money back period. Why would the seller bother to stump up money in advertising, promoting etc. . . and make himself/herself open to a possibility of all that hard work going to waste? Nah, they'll get you in the small print . .

Once you have done all the due diligence and are happy that you can handle the drawdown and the losses, go for it.

drawdowns have a nasty habit of getting worse when you put your money on the line, when you have your hope of a livelihood on the line. What always happens is that you get wiped out.

The market NEVER gives away her hand that easily.

If anyone is thinking of buying a system my advice is DON'T - none of them work. Look for the free ones and play around with them with paper trades if you are curious (and they are nothing but pieces of curiosity), but ALL of them are sold by people who ultimately cannot trade (or think it's too risky to put their own money on the line), which is why they are for sale.

As a biological mathematician I have a cynical view of life in general, and the one thing that the natural world has taught me is that nothing is ever given away for "free". In human life, money is the one resource that separates you from having a 9 - 5 obligation 5 days a week, and a life of time mostly on your own terms. The steps to get to the latter situation is NEVER given away "freely" or so easily.

 

[0007]

As a biological mathematician I have a cynical view of life in general, and the one thing that the natural world has taught me is that nothing is ever given away for "free". In human life, money is the one resource that separates you from having a 9 - 5 obligation 5 days a week, and a life of time mostly on your own terms. The steps to get to the latter situation is NEVER given away "freely" or so easily.

Agree, in terms of purchases: sometimes you get what you pay for, often you don't. No one gives away money.

The great "free" things in life are people's help, friendship and good deeds.

 

[Mathemagician]

A thoroughly objective reply from a managed systems broker

I am not a broker of any kind, managed systems or otherwise. This does not change the fact that there are circumstances under which trading other peoples' systems makes perfect sense. The specific scenario was offered to contrast with the opinion expressed earlier (and frequently) that all people in all cases should just learn to trade for themselves rather than trade others' systems.

jj

 

[dbphoenix]

I am not a broker of any kind, managed systems or otherwise.

A futures trading systems commodity trading advisor then? So many words...

 

[Mathemagician]

I'm a CTA and CPO who knows how to separate business from pleasure. I have a lot to offer and I post here with no agenda because I enjoy it and because I'm sick of the attitude at the Tradestation forums. Feel free to peruse my posts and blog if you wish to verify or refute.

jj

 

[dbphoenix]

That'll have to wait. Your website fascinates me...