In the retail market, Trading Professionals are not easy to find.
Having worked in trading for many years, and with an understanding of the Wholesale/Institutional space, it is obvious to me which ‘experts’ should be overlooked immediately.
But for the average retail punter looking for a way to spread out a bit of their risk, and hopefully make a bit of extra money letting someone else do the trading, it can be a daunting and often depressing exercise.
Here are some tell-tale signs that you need to take note of:
- No system is fool-proof
There is no silver bullet in trading.
People spend years developing and refining systems before launching them. It takes considerable machine power, which is always being upgraded and enhanced globally, thus the competition is stiff and it is a constantly evolving ecosystem.
- Check out the trader’s CV and background
You wouldn’t give your money to just anyone would you? Of course not!
Before handing over your capital to an anonymous person, it’s best to ask a few questions first. Things like:
- How long have you been a trader?
- Do you have any professional background?
- What is your trading process?
- Can I see you track record?
- How do I verify it your track record?
All these questions are standard for Money Managers throughout the Institutional world, so there’s no reason why you wouldn’t cover this off with retail Expert Advisors (EA’s). If you’re not satisfied with the answers, don’t invest!
- Expect a possibility that you can lose all your money
It can happen, trust me. I know all too well!
One of the unfortunate things about system trading is that a programmer will stumble upon a trend in a market that is present for a period of time and they are able to program a successful strategy around that.
Unfortunately, that trend eventually disappears and with it the ability for the algorithm to make money. This is usually how they blow up, as the strategy becomes less effective, the trader begins to increase the risk to ensure the return profile remains similar.
Until it doesn’t, and poof, say bye-bye to your money…
- Ensure to use a properly regulated broker
Your money is already at risk in the markets, don’t expose it to other risks that can be avoided, like placing it with a broker with little or no licencing requirements or established financial conduct.
And it always helps to go online and seek out reputable sources for complaints and feedback on licenced brokers who hold FCAs or AFSLs.
- I’ve never seen a bad back test!
I have heard the term “back-test” used for just about every strategy ever invented. The vast majority are curve-fit (constructing a return profile to best fit the data) to the strategy without the programmer realising.
Lots of Money Managers also like to quote their realised P&L and not their unrealised P&L. This is because they like to hold unrealised losses for long periods of time if a position goes badly out of the money. Insist that they quote the daily EQUITY of the account, not the BALANCE. It also helps to see the daily change in FREE MARGIN for the account, which will track the combined realised and unrealised P&L of the account.
Otherwise, they will probably send you a chart that looks like this:
It looks awesome doesn’t it!? That’s because it belongs to Bernie Madoff. Here is the Madoff strategy up against the return profile of the S&P:
Seriously, if you see a yield curve going from bottom left to top right, politely excuse yourself from the conversation and run, run away as fast as you can!
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