Category Archives: Investors

Scam-o-meter on track record

January 9, 2017 beta_trader 7 Comments

Trying to become a true profitable trader and building your own trading system is a long and tedious journey. You will have tough periods climbing sloping mountains of doubts and fighting the wild psychological bias hidden in the bushes all along your travel. The obstacles on the path to victory are diversified and one of them can be very odorous : the scam. You will have to avoid to walk on it like dog poops.

Here’s a little article to help the investor and the rookie trader to detect and avoid them. You can use it on the track records you can see on every trading websites. This is a very simple scoring system where the 0 lets assume that the system is reliable and the 10 tells you to run away from the trading system.

Later, I’ll do an article to use efficiently the scamometer on trading websites.

We will start with a scamo-score of 0 and we will add points progressively trying to detect the best dog poops in the retail trading landscapes.

The drawdowns

When you see a bleeding equity curve, you can ask yourself how the trader is managing the risk… Does he use stoplosses ? Does he hedges ? Does he keep positions opened during long time ? Does he accept the losses ? Does he like unicorns ?

By seeing bleeding equity curve, you can add a +4 to the scamometer. I chose arbitrarily the most popular system on the Myfxbook website. The equity bleeds like an investor cutting his wrists:

The curve look

When the growth curve is very sexy, appealing and hot, just like a linear curve, you can worry. Indeed, the track record shows in this case that the pseudo “trader” doesn’t accept the losses and is very likely not using stoplosses. This is very typical of the Martingale/Grids systems.

Give yourself a favor and add a nice 6 points to your scamometer when you see this :

Sorry guys, the progression of a profitable system equity curve is never linear. Over the time, you’ll see this kind of thing (this other system is from the same scam-author than the previous one) :

The ratios

The CRR (Chance/Risk Ratio) is a simple but efficient ratio calculated by dividing the percentage growth by the drawdowns. Thus, you have a quick estimate of risk and potential of the trading system. You can calculate it on a montly, yearly or historic basis to notice the evolution and the risk mitigation of the trader.

If the CRR is lesser than 1, you have a failing trading system in progress. This is cute to see. You can easily add a +2 to your scamo-score.

If the CRR is above 1, you have some kind of flat expectancy system but you have to confirm it with other metrics. This is quite neutral.

If the CRR is above 2-3, you start to see a decent trading system making money in theory. Again, you have to confirm this with other metrics.

The system vocabulory

When you assess a trading system, you have to read a short description to sum up the trading style of the trader (swing/scalper, fundamental/technical, …). The scamometer can detect some keywords in order to warn the investor against the shittiest systems. Here a sample of the interesting keywords :

Martingale : This keyword is pretty magic. If you want to assess a system based on Martingale, you can directly put your scamoscore to 10 and forget all other criteria. You found the bullshit holy grail. If you are bored, watch the system over the time, let it explode, this is always funny and some kind of relaxing to see. This is less funny for the investors/traders.
Grid : The grid is the cousin of the Martingale. Different phylosophy, same result. It’s designed to fail but it’s a bit more vicious. The Martingale has often a low life expectancy but the Grid can live longer before blowing up your account. But it will. The risk exposure of this kind of system can be huge and the risk control is almost always none.
Full automated trading system : This one means that there is only a dumb robot taking trades on the Markets. This robot is so smart that he knows better than a human how the Markets behave. Is it possible that a simple EA trade efficiently the Markets over the long run ? The markets are so easy to corner ? Hundreds lines of code can beat the other market actors ? Even if the deep learning concepts could improve the Markets insight in the IT field, you can safely add a +4 when you see a 100% automated trading system. If the trader uses a “mix” of manual and automated trading, the scamometer could significantly decrease its BS detection process depending on the trader style.
Custom/Proprietary indicator : This is a trading system using a very top secret confidential indicator created by the trader. He was lucky (or smart ?) enough to find the Holy Grail. This is only owned by the creator and he doesn’t want to share its secrets because, you know, if he does, he will lose its hedge on the Markets… Of course trading holy grails don’t exist… No custom/proprietary indicator can corner the Markets. And you can ask yourself what would happen if one day a trader discover the Holy grail ? How will the Markets behave ? Even if you can create nice custom indicators, it will always be derivated from the unique raw information : the Price Action. Save time : use the raw information instead of derivated ones.

Using the prefix “pseudo” before the 2 first keywords doesn’t change the score calculation.

But sometimes, the lack of certain keywords can increase drastically the scamoscore. For example, if you don’t find any information about stoplosses and you know that it’s some kind of UFO concept for the trader, you can add a nice +9 to the overall score. This remark can be moderated by the fact that instead of using stoplosses, true profitable traders can use hedging. However this is very specific, hard, and complex skills to master. The number of true profitable traders using successfully the hedging instead of the stoploss is equal to the number of finger on a hand of an armless person.

The trader beliefs

This is very important to identify how the trader sees the Markets and the risks associated. Its behavior and words are important too. You’ll find some “traders” being arrogant, proud and pretentious. All the true profitable traders I know have a common quality : they are humble. And on the Forex you have to be humble. You have to respect the Markets. Once you ended your journey by trading a profitable system, you become necessarily humble because of all the dusts you bit before achieving your goal.

Here’s a funny story of a scam-trader offering its signal service on some signal forum community few months ago. You can see the bunch of common and basic psychological bias he had and its amateurism :

I don’t even talk about the huge and so risky performance he had. You can see the wizard explaining that he has a “gift” being able to know where the Markets will move :

He self claimed being the the “Goldman Sachs” of retail market. Such a gem. This one comes back regularly on the rookie traders forums. A lot of people want to trade for JPMorgan or Goldman Sachs banks. It looks like this is the edge of the trader carreer. But you can trust me, when you are a successful profitable and independant trader, you certainly don’t want to trade for these intitutions.

When some non expecting events occured, the “trader” finds excuses (very common psychological bias when you start trading is to not undertake your own responsabilities) :

How this has ended ? With a lovely margin-call of course:

End of story. End of trader/investors money.

The winratio

This rule is very easy to understand. If you find a system with a overall winratio higher than 90%, you can add +6 to your scamoscore.

Otherwise, it depends on the trading style of the system and especially the expectancy of the system. Considering a winratio without taking in account the R:R doesn’t make any sense.

The lifespan

Again, it’s a very simple and obvious rule to follow :

Less than 3 months of track record, you can add 5 points to your scamometer.
Less than 6 months of track record, you can add 4 points to your scamometer.
Then, you can decrease by 1 point every 3 additional months.

The backtest results are not considered by the scamometer. Backtest and demo trading are nothing compared to the real live trading.

Abracadabra !

By applying these weird and empirical calculation rules, you’ll have to say “Good bye” to your money in the future if the overall scamoscore is above 10.

Abracadabra… And it’s gone !

Investors, Money management

Stop your loss

September 7, 2015 beta_trader 3 Comments

When I started this blog I never imagined that I could ever write an article on the necessity to use stoploss in Forex trading. However, browsing the retail forex world is so astonishing when you see plenty of traders taking orders without stoploss. When I started to address the Forex Market and was still naive, I thought that the vast majority of traders couldn’t think one second about entering the Markets without stoploss. I thought only few of them were cowboys telling themselves the stoploss is just an inconvenience for their ego. I was wrong. It is the contrary. More retail traders are not using stoploss than using it.
I’m often amused when I look at the “signal providers” or “professional traders” equity/growth charts when they don’t use stoploss, their equity curve can be very typical. For these kind of traders, claiming themselves “pro” and wise “risk” manager, I will be happy to be the counter-part taking their money when they will margin call. Forex is not Poker.

The stoploss is an automatic order that will be triggered when the price will reach it. It’s the opposite of the TP (Take Profit) order, its alter ego. The stoploss is created in order to protect your money, to manage your risk. But you have no obligation to use it, you can take a position without any stoploss. It can be seen as an annoying thing preventing your trade to reach its target. Because if the price reaches your stoploss before reaching your target, you lose money ! Shit ! I don’t want to lose money ! I’m here to make money,.. the stoploss is bullshit !

You can have this standpoint when you’re not able to see further than the tip of your nose. Because, in the hard real Forex world, you can’t earn money consistently without losing a bit of money sometimes. It’s like that and it’s perfectly normal if you think about it 2 seconds. It cannot be different. But we have to ask ourself why the stoploss is not an option to earn money on the Markets over the long run ?

Why using stoplosses on the Market o_O’ ?

Because ! …thanks for reading this article…

There are few reasons why the stoploss is so important on the Market and we will see that it’s way more than a simple contrary order to your position.

1°) The Stoploss defines the frame of your trading system

It’s important to understand that every trading system is technically nothing more than a basic probabilistic system. Technically of course. Because, in practice, successful trading is just about solving your psychologicals bias. So, technically your trading system can be seen as a probabilistic system with standard parameters.

Your trading strategy is defined by a set of rules which you follow (or not) and it creates a trade history. You will have winning trades and losing trades. You can say you are profitable when there is more money on your account before you started to trade during the period you analyze. Depending on your trading style, you can have a lot of trades per month, a lot of winners or a lot of losers. But what’s universal here is that you will have winners AND losers. You can’t avoid losing trades, that’s impossible.

Now the question is : what is the definition of a winning trade and a losing trade ?

We could simply argue that a winning trade is a position where you make money and a losing trade is a position where you lose money. The problem with this kind of definition is that your losing and winning concepts will vary and change over the time. It’s too generic. If you think about it, a trade that went well and was in profit during some time can reverse and become a loser. When will you decide then it will be a winner or a loser ? It will depend on you, when you take the decision to cut the trade. For one single trade, depending on your mood, your behavior, your psychology, the same trade can be a winner or a loser. It’s a problem. Be sure that the human psychology is a very changing thing. How can you assess the profitability of a system if you change the winning and losing concepts all the time ? How can you calculate the expectancy of a system by changing the winning and losing rules all the time ? Can you know if you earn money on the Market if you don’t know if it’s a losing position ?

To become successful, we have to avoid relying on changing and varying things like us. We have to set the rules and the system has to be as steady as possible to evaluate the risks properly. Here comes the stoploss.

The stoploss will help you to set the losing trade concept without changing the rules. By setting your stoploss on every trade, you know exactly when your trade is a loser one : when the stoploss is hit. From there, you will be able to assess the expectancy and the profitability of a trading system because you defined the “loss” concept relating to the “win” concept. Otherwise, good luck

2°) The Stoploss is designed to manage your risk

As described before, trading is a probabilistic game. When you take a position on the Markets, you bet on the future value of an asset. It’s pure speculation. Your trading style and system will dictate you how many trades you can take every month and for every trade you have to calculate the risk implied. You cannot avoid it. Even if you don’t want to do it, the lotsize of your position will do it for you. As said before, you know as a wise trader that you will have systematically losing trades in your track record.

If don’t use stoplosses when you take a trade, you cannot know how many you will lose. This is financial Markets world. It’s not about dealing sweets during recreation. When you enter the Market you NEVER know what will happen. You have to expect always the worst-case scenario. What if you take a position without stoploss and the Market will go instantaneously against you ? When will you cut the trade to accept your loss ? Will you accept the loss ?

Entering the market without stoploss is like “all-in” in Poker. You risk all your capital on a single one position. It’s good if you win but it’s pretty ugly if you lose. Like the Poker, it’s all about probabilities. You can make a good move if you are lucky but it’s impossible to think about making money over the long run with this kind of standpoint. You can earn a lot of money in the short-term but one day, you will lose all your money. It’s useless to earn a lot of money to lose it all few days after. Being a wise risk manager, as every trader is, and risking all your money and the money of your clients on one single position doesn’t make sense at all.

Using a stoploss on every trade allows you to expect the worst and manage the risk on the Markets. Then, you can calculate the risk you want to take on each trade in case the price will reach your stoploss before your take profit.

A lot of so-called “pro” traders charts are screaming the use of the “Russian roulette” trading style by not using stoploss on every trade. It’s pretty distinctive. I chose some myfxbook charts almost randomly :

We can never have the proof that these guys don’t use stoplosses just by staring at their chart but the “tobbogan” is really typical of this kind of system. These systems have often really high winratio, as seen in the last example. It can be explained easily by understanding that these dangerous systems are likely to not use stoplosses and letting the position run until the Price go in favor of the “trader”. That’s why the winratio is so high. However, sometimes the Market do some erratic movements and go against the position. The “worst-case scenario”. One day, the trader has the obligation to close the position if he doesn’t want to margin call. So it’s a huge lost of the entire capital in 1 or 2 trades. You could argue that overall these systems made money. You are right. But as usual, what if you used this system to trade your money just before the drawdown ? What if you see your capital going down for 60% ? You would have left and probably you would have lost a lot of money. And I don’t talk about the equity curves this time. The margin call is a matter of time.

Another typical “I don’t know what is a SL” trading style chart is the “floating” open positions. You can see that the equity curve and the growth curve hate each other :

It’s due to the same root problem : the trader doesn’t accept to lose money. He thinks the Market is wrong and its trading is right. He is convinced that the Market will reverse soon so he lets its current positions floating without using stoplosses. Until one day :

Always expect the worst when you enter the Market. Use stoploss to protect your capital.

I already talked with people telling me that stoplosses are useful but we have no guarantee that our broker will honor them in very volatile conditions. It can be true. During the SNB earthquake in January, some brokers were not able to execute all the stoplosses. But it’s another issue relating to the Market structure and the broker itself with its liquidity providers. I doesn’t dispense you to set a stoploss for each trade you take.

Moreover, as a swing trader, you have to know that your stoploss orders are more likely to be honored (in comparison to the intraday traders using minors S/R levels) because your stoploss is really likely to be in big order clusters which improve the probability for them to be triggered, even during this kind of extreme volatility periods. For information, you can see here that the location of the big order clusters are often where we put our stoploss :

3°) The Stoploss symbolizes your loss acceptance

The last but not the least. Don’t forget that the psychological aspect is the main issue to become a profitable trader over the long run. In the early stages of your trading journey, you’ll have to accept the Market is always right and you will be wrong sometimes. It’s not necessarily because you did mistakes but because you have to lose a bit of money to earn more money. The stoploss is here to tell you that in case the price triggered it you lost money but you protected your capital. It’s a loss. You have to deal with it. Accept the loss to earn money over the long run.

Moving a Stoploss during a live trade highlights your difficulty to deal with the losses, when you widen it. Moving a stoploss is like not using a stoploss. You increase the initial risk of your trade, which is a statistical error. Never move your stoploss once it’s set. Except to put it on break-even.

To conclude, here is an interesting podcast of Walter Peters. I advise you to listen these 2 true pro-traders speaking about stoploss : http://www.2traderspodcast.com/podcast/ep04-what-goes-into-setting-your-stop-loss

Another interesting quote from Rolf of Tradeciety :

A stop loss is like a seatbelt. You don’t expect to need it every time you get in a car, but when you need it, it’s there.

— Tradeciety (@Tradeciety) 29 Juillet 2015

Investors

The Beauty of the Pip

July 23, 2015 beta_trader 2 Comments

The fact that the vast majority of traders and investors on the Forex Market are losing money is well known. The so-called statistics claim that more than 95% of the traders lose money. It can seem really huge but when you are a true profitable trader, it’s always surprising to see the incredible amount of scams and bullshit on the web. The ratio could be the same : 95% of shit and 5% of useful information. Nothing is done to help the wannabe traders in a efficient way. I’ll try to give some tips for the investors to identify the wrong and dangerous trading systems in a series of articles.

To assess properly a trading system it’s important to understand the information displayed on your screen, like Myfxbook statistics for example. There is a lot to say about it. However, I’d like to write about a simple and easy way to know if a signal provider, trader, system is not transparent with its performance.

I’m still surprised to see all these so-called professional traders and magical trading systems printing their performance in PIPS. Honestly, it doesn’t make sense.

It’s important to understand that the quantity of PIPS swallowed during the month is not important at all. The percentage growth is.

Why ? Because the quantity of pips doesn’t represent the quantity of money you can earn. The Pip is the basic value of the Market and has to be converted to make sense in term of money. It’s crucial to understand that even if you earn a lot of pips per day, it doesn’t mean you earn a lot money. As I already explained on this website, if you want to manage properly your risks on the Market, you have to trade with constant risk : you risk always the same amount of capital per trade (subliminal reminder message : you never know if a trade will be a winner or a loser one, so treat each trade with the same risk).

By using constant risk approach, you don’t care about the amount of pips. The amount of pips highly depends of the trading style and timeframe used in a system. To be more concrete, here are examples of trades I took with big difference in the amount of Pips.

First, the GBPCHF Weekly trade I took during March 2015 :

Earned Pips : 454 pips

Second, the AUDJPY H4 trade I took few weeks ago :

Earned Pips : 75 pips

In the first case, I won 454 pips on the GBPCHF trade and in the second case, I won only 75 pips on the AUDJPY trade. Did I earn more money from the GBPCHF trade with more pips involved ? Absolutely not. I earned the exact same amount of money : 2%. That’s all.

Why the amount of pips doesn’t make any difference ? Because my lot size was different. It was calculated to risk only 2% on each trade. Since the first trade is a Weekly one, the stoploss was wider than the one on the AUDJPY trade, which was based on the H4 timeframe.

It was an example. Now think about it : when a pro-trader tell you he is able to make hundreds of pips every week, does it make sense ? In fact, no. He could earn plenty of pips every day and make only tiny percentage growth depending on the risk he takes on the Market. And don’t forget the amount of pips doesn’t give the risk approach of the traders.

To show you where lies the problem for the retail investors, I gone to the signal providers list on the famous Myfxbook website and I took the top 3 signal providers :

I browsed the website of these 3 signals providers. For each, I displayed the “results/performance” menu used to prove to the customers that the signal is efficient and makes money.

First one : Pipsar

Second one : Forexsignum

Third one : App-Forex-Signals

Funny, isn’t it ? Nobody talks about percentage growth, only the amount of pips. You can even see the graphs from Myfxbook displaying the quantity of pips per month but not the native Myfxbook graph with the percentage growth…

With these data, you can’t know if the performances are good for each signal provider. Don’t get me wrong : I don’t say they not making money. I only say : they are not transparent on their performance because displaying the amount of pips has no sense.

And don’t forget that their drawdowns are not even visible (except forexsignum)…

My advice : Be careful when you see this kind of website. I chose them almost randomly as examples. The performance data, expressed as Pips, doesn’t show anything. It’s not a good criteria to choose a reliable trading system. The percentage growth is appropriate in conjunction with other data (expectancy, profit factor, historical drawdowns, average R:R, …).