Should Trading Vendors Trade Their Own Money?
If you are looking at purchasing or leasing an algorithmic trading system or automated trading strategy, or looking at following a publisher's trading signals, a legitimate question to ask the vendor is "do you trade this with your own money?"
While the answer to this question can be illuminating, and assuming you get a truthful answer, is it really important if the vendor trades with his own money?
For 100% mechanical strategies (also known as rule based systems, algos or algorithmic trading systems), I'd say absolutely yes - the vendor should trade that system with real money, and should be able to prove it via independent accounting audits, brokerage statements or third party verified results.
Asking for statements might work, but watch out - they can be easily Photoshopped. I'd be seriously concerned if a vendor didn't trade a 100% mechanical system with real money. After all, if the system is so good, why wouldn't he or she trade it with real money?
But, there could be good reasons why a vendor would not trade their own algo system. For example, maybe the large capital requirements put it out of the vendor's reach. Or, maybe the system requires a fast internet connection, and the vendor lives in an area without one. Maybe the vendor just doesn't like the risk involved.
At the same time, however, a vendor who does not trade a 100% mechanical system raises many red flags. Is it because the results are unobtainable in real life? That could be the case for a scalping system. Or, maybe the vendor has no trading capital because almost every previous system he traded with real money failed. That is true more than you'd like to think.
What I would recommend if you are interested in an algo trading system (be it signals, disclosed code, hidden and locked code or anything else) is to ask the following questions:
For Algo Trading Vendors
A. Do you trade this with real money ?
If answer to A is yes:
B. How long have you been trading it, and do your real account results match the strategy backtest?
C. Can you show me recent brokerage statement confirming you actually trade? (personal information, account balances, etc. can be redacted)
If answer to A is no:
D. What is preventing you from trading with your own money?
These questions should help you get in the algo developer's head, and then you can make a better decision.
For Discretionary Trading Vendors
For discretionary systems (ones where some or all of the decisions are made by the vendor, not by a set of definable computer instructions), I'm not as convinced, and I'll tell you why. The emotions of making and losing real money can very easily cloud one's judgment. I've seen good discretionary traders go "bonkers" when something terribly good or terribly bad happens. When real money is on the line, some people become reckless (trading like crazy), and some become timid (not trading at all). Maybe they would have made better decisions if their real money wasn't at stake. Maybe they would have made better decisions - who knows?
What I would recommend if you are interested in a discretionary system is to ask the following questions:
A. Do you trade this with real money (and how much)?
If answer to A is yes:
B. What, if anything do you do to control your emotions while trading? Do you work with a trading coach? Do you think emotions are important?
If answer to A is no:
C. What is preventing you from trading with your own money?
These questions should help you get in the discretionary trader's head, and then you can make a better decision.
One additional criteria: be on the lookout for these 7 snake oil vendors. See if the person you are dealing with matches one of these descriptions.
There are many questions you should ask before buying any type of trading advice, be it a computer program, "black box" system, algorithmic trading strategy or trading signals. The question "do you trade this with your own money?" is worth asking, and should definitely be a part of your due diligence investigation.
While the answer to this question can be illuminating, and assuming you get a truthful answer, is it really important if the vendor trades with his own money?
For 100% mechanical strategies (also known as rule based systems, algos or algorithmic trading systems), I'd say absolutely yes - the vendor should trade that system with real money, and should be able to prove it via independent accounting audits, brokerage statements or third party verified results.
Asking for statements might work, but watch out - they can be easily Photoshopped. I'd be seriously concerned if a vendor didn't trade a 100% mechanical system with real money. After all, if the system is so good, why wouldn't he or she trade it with real money?
But, there could be good reasons why a vendor would not trade their own algo system. For example, maybe the large capital requirements put it out of the vendor's reach. Or, maybe the system requires a fast internet connection, and the vendor lives in an area without one. Maybe the vendor just doesn't like the risk involved.
At the same time, however, a vendor who does not trade a 100% mechanical system raises many red flags. Is it because the results are unobtainable in real life? That could be the case for a scalping system. Or, maybe the vendor has no trading capital because almost every previous system he traded with real money failed. That is true more than you'd like to think.
What I would recommend if you are interested in an algo trading system (be it signals, disclosed code, hidden and locked code or anything else) is to ask the following questions:
For Algo Trading Vendors
A. Do you trade this with real money ?
If answer to A is yes:
B. How long have you been trading it, and do your real account results match the strategy backtest?
C. Can you show me recent brokerage statement confirming you actually trade? (personal information, account balances, etc. can be redacted)
If answer to A is no:
D. What is preventing you from trading with your own money?
These questions should help you get in the algo developer's head, and then you can make a better decision.
For Discretionary Trading Vendors
For discretionary systems (ones where some or all of the decisions are made by the vendor, not by a set of definable computer instructions), I'm not as convinced, and I'll tell you why. The emotions of making and losing real money can very easily cloud one's judgment. I've seen good discretionary traders go "bonkers" when something terribly good or terribly bad happens. When real money is on the line, some people become reckless (trading like crazy), and some become timid (not trading at all). Maybe they would have made better decisions if their real money wasn't at stake. Maybe they would have made better decisions - who knows?
What I would recommend if you are interested in a discretionary system is to ask the following questions:
A. Do you trade this with real money (and how much)?
If answer to A is yes:
B. What, if anything do you do to control your emotions while trading? Do you work with a trading coach? Do you think emotions are important?
If answer to A is no:
C. What is preventing you from trading with your own money?
These questions should help you get in the discretionary trader's head, and then you can make a better decision.
One additional criteria: be on the lookout for these 7 snake oil vendors. See if the person you are dealing with matches one of these descriptions.
There are many questions you should ask before buying any type of trading advice, be it a computer program, "black box" system, algorithmic trading strategy or trading signals. The question "do you trade this with your own money?" is worth asking, and should definitely be a part of your due diligence investigation.
About Author: Kevin Davey is an award winning private futures, forex and commodities trader. He has been trading for over 25 years.Three consecutive years, Kevin achieved over 100% annual returns in a real time, real money, year long trading contest, finishing in first or second place each of those years.
Kevin is the author of the highly acclaimed algorithmic trading book "Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading" (Wiley 2014). Kevin provides a wealth of trading information at his website: http://www.kjtradingsystems.com
Copyright, Kevin Davey and KJ Trading Systems. All Rights Reserved. Reprint of above article is permitted, as long as the About The Author information is included.
Kevin is the author of the highly acclaimed algorithmic trading book "Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading" (Wiley 2014). Kevin provides a wealth of trading information at his website: http://www.kjtradingsystems.com
Copyright, Kevin Davey and KJ Trading Systems. All Rights Reserved. Reprint of above article is permitted, as long as the About The Author information is included.