Watch Out For The Trading Wolves
The trading world is a tough one. Dog eat dog. Take no prisoners.
Those are the facts of this zero sum trading game. And, of course, in such a competitive environment, there are inevitably a lot of sheep and a lot of wolves. The sheep are typically retail traders, preyed upon by many different types of wolves. High frequency traders are wolves, and more traditional traders at hedge funds and commodity trading advisers (CTAs) are other wolf types. These wolves are your competition, and there is not a lot you can do to eliminate them.
However, there is one brand of wolf you can escape. These are the trading vendor wolves; the proverbial “wolves in sheep’s clothing” who claim to be trying to help the sheep with their trading systems/education business, but are really lining their own pockets at the sheep’s expense.
As a retail trader, you need to take the utmost care to steer clear of the trading vendor wolves. So, here are a few practical tips to help you avoid them.
1) Ignore The Hype
Vendor advertisements are everywhere…
“200% annual returns!” they shout.
“No drawdowns ever!”
“90% winning percentage!”
Most savvy consumers understand that such statements are sales hyperbole, and not meant to be taken seriously. But, ethical and moral issues of misleading advertisements aside, what exactly is the harm if most sheep don’t believe the claims?
The trick lies in what is called the “advertising discounting effect.” As an astute trading student, you may realize that 200% annual returns on a consistent basis are nearly impossible. So, your mind discounts this 200% to a lower amount, say 100%. Therefore, you see 200% and think “if I could get just half of what they claim, I’d be doing great!”
That is the discounting effect; you feel like you are reducing their claims, and being conservative with your expected result.
The discounting effect gives you false confidence that spectacular trading results are still possible, since they are well below what the vendor claims. Unfortunately, this just isn’t the case. Think of it this way: if a vendor had a 200% system, why would he need to sell it, when he could make millions trading himself?
Isn’t that just giving away the golden goose for pennies on the dollar?
The reality is that the greater the vendor’s claims, the less likely it is to make money in the real world.
2) Verify Everything
In this age of easy access to information on the Internet, it is certainly worth your time investigating the claims of any trading vendor. Independent trading forums, such as futures.io, are an excellent source of objective, unbiased reviews of many trading vendors.
For larger vendors, the Better Business Bureau or ripoffreports.com may have useful information.
Most trading vendors claim to be highly successful traders. Many times this is easy to verify by Googling the vendor’s name and address. For example, you might just find that a “highly successful trader” with an “ocean view” estate is really living in a trailer park on a small hill, a mile from the Atlantic Ocean!
Other times, a simple e-mail or phone conversation with a vendor will yield significant clues. If a trading vendor, for example, explains that his system can frequently buy at the bid and sell at the ask, that should tip you off that his trading is likely simulator-based, and almost certainly not replicable in the real world.
The main point with verification is that it is your responsibility and duty to find out all you can about a trading vendor. If something smells fishy, just walk away.
3) Remember the Adage: “If It Sounds Too Good To Be True…”
One of the easiest ways to protect yourself from unscrupulous trading vendors is to remember the old phrase “if it sounds too good to be true, it probably is.” If you see performance that is extraordinary, or equity curves that rise at a smooth 45 degree angle, chances are the results will be impossible to achieve in real life.
Sure, there will be warning disclaimers given (“past performance is not a guarantee of future results”), but due diligence is still needed.
An excellent example of this was the performance of Bernie Madoff’s funds. Extraordinary performance blinded many people to the fact that the results were just too good to be true. Unfortunately, their eyes were opened a bit too late.
***
One of the best solutions is to take matters into your own hands. No one cares about your financial future as much as you do, so it makes sense to put yourself in a trading- leadership position. What does this mean? Simply put, you need to develop trading approaches and systems with which you feel comfortable, and that are based on your own research.
The do-it-yourself route is not easy, though. Developing trading systems, for example, takes a lot of work, and has many pitfalls along the way. It is very easy to create approaches that make money in historical testing, but get crushed by the market in real time. For many, the key is finding a reliable, trustworthy trading vendor or advisor to teach them how to develop trading systems the correct way.
Once you understand how to create high-performing trading systems, you won’t even look at the advertisements of most trading vendors and, if you do, you’ll probably just laugh to yourself. You’ll happily realize that your future is guided by your hard work, not by scam artists.
Very few industries have vendors who promise as much hype but deliver as little as most trading vendors do. But that is not to say that all vendors are bad; certainly many fine and ethical vendors are out there, and can be of great help to a struggling trader.
If you ignore the sales hype, take the time to verify everything a vendor tells you, and remember the “too good to be true” adage you’ll be miles ahead of most of the trading sheep.
The ultimate goal, however, is to stop being a sheep altogether. The most direct path to that goal is to learn how to build trading systems and approaches for yourself. Such a course of action is the ultimate in wolf avoidance.
Those are the facts of this zero sum trading game. And, of course, in such a competitive environment, there are inevitably a lot of sheep and a lot of wolves. The sheep are typically retail traders, preyed upon by many different types of wolves. High frequency traders are wolves, and more traditional traders at hedge funds and commodity trading advisers (CTAs) are other wolf types. These wolves are your competition, and there is not a lot you can do to eliminate them.
However, there is one brand of wolf you can escape. These are the trading vendor wolves; the proverbial “wolves in sheep’s clothing” who claim to be trying to help the sheep with their trading systems/education business, but are really lining their own pockets at the sheep’s expense.
As a retail trader, you need to take the utmost care to steer clear of the trading vendor wolves. So, here are a few practical tips to help you avoid them.
1) Ignore The Hype
Vendor advertisements are everywhere…
“200% annual returns!” they shout.
“No drawdowns ever!”
“90% winning percentage!”
Most savvy consumers understand that such statements are sales hyperbole, and not meant to be taken seriously. But, ethical and moral issues of misleading advertisements aside, what exactly is the harm if most sheep don’t believe the claims?
The trick lies in what is called the “advertising discounting effect.” As an astute trading student, you may realize that 200% annual returns on a consistent basis are nearly impossible. So, your mind discounts this 200% to a lower amount, say 100%. Therefore, you see 200% and think “if I could get just half of what they claim, I’d be doing great!”
That is the discounting effect; you feel like you are reducing their claims, and being conservative with your expected result.
The discounting effect gives you false confidence that spectacular trading results are still possible, since they are well below what the vendor claims. Unfortunately, this just isn’t the case. Think of it this way: if a vendor had a 200% system, why would he need to sell it, when he could make millions trading himself?
Isn’t that just giving away the golden goose for pennies on the dollar?
The reality is that the greater the vendor’s claims, the less likely it is to make money in the real world.
2) Verify Everything
In this age of easy access to information on the Internet, it is certainly worth your time investigating the claims of any trading vendor. Independent trading forums, such as futures.io, are an excellent source of objective, unbiased reviews of many trading vendors.
For larger vendors, the Better Business Bureau or ripoffreports.com may have useful information.
Most trading vendors claim to be highly successful traders. Many times this is easy to verify by Googling the vendor’s name and address. For example, you might just find that a “highly successful trader” with an “ocean view” estate is really living in a trailer park on a small hill, a mile from the Atlantic Ocean!
Other times, a simple e-mail or phone conversation with a vendor will yield significant clues. If a trading vendor, for example, explains that his system can frequently buy at the bid and sell at the ask, that should tip you off that his trading is likely simulator-based, and almost certainly not replicable in the real world.
The main point with verification is that it is your responsibility and duty to find out all you can about a trading vendor. If something smells fishy, just walk away.
3) Remember the Adage: “If It Sounds Too Good To Be True…”
One of the easiest ways to protect yourself from unscrupulous trading vendors is to remember the old phrase “if it sounds too good to be true, it probably is.” If you see performance that is extraordinary, or equity curves that rise at a smooth 45 degree angle, chances are the results will be impossible to achieve in real life.
Sure, there will be warning disclaimers given (“past performance is not a guarantee of future results”), but due diligence is still needed.
An excellent example of this was the performance of Bernie Madoff’s funds. Extraordinary performance blinded many people to the fact that the results were just too good to be true. Unfortunately, their eyes were opened a bit too late.
***
One of the best solutions is to take matters into your own hands. No one cares about your financial future as much as you do, so it makes sense to put yourself in a trading- leadership position. What does this mean? Simply put, you need to develop trading approaches and systems with which you feel comfortable, and that are based on your own research.
The do-it-yourself route is not easy, though. Developing trading systems, for example, takes a lot of work, and has many pitfalls along the way. It is very easy to create approaches that make money in historical testing, but get crushed by the market in real time. For many, the key is finding a reliable, trustworthy trading vendor or advisor to teach them how to develop trading systems the correct way.
Once you understand how to create high-performing trading systems, you won’t even look at the advertisements of most trading vendors and, if you do, you’ll probably just laugh to yourself. You’ll happily realize that your future is guided by your hard work, not by scam artists.
Very few industries have vendors who promise as much hype but deliver as little as most trading vendors do. But that is not to say that all vendors are bad; certainly many fine and ethical vendors are out there, and can be of great help to a struggling trader.
If you ignore the sales hype, take the time to verify everything a vendor tells you, and remember the “too good to be true” adage you’ll be miles ahead of most of the trading sheep.
The ultimate goal, however, is to stop being a sheep altogether. The most direct path to that goal is to learn how to build trading systems and approaches for yourself. Such a course of action is the ultimate in wolf avoidance.
About The 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 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 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.