It is often said that if something seems too good to be true, then it usually is.  This is the case with many of the trading systems offered for sale on the Internet.  Many unscrupulous promoters prey on the desire of traders for a shortcut to riches. Learn how you can avoid becoming another victim of the scam artists

Here is a checklist to use when evaluating a system for sale:

• Does it make unreasonable claims like 80-90% accuracy?  Most professional traders consider themselves fortunate to get 60% accuracy.  In fact, fixation on accuracy rather than expectancy (the long run cash return from a trading system) is a characteristic of the beginning trader that is exploited by trading system promoters.
• Does the system focus on market entries, rather than money management?  A good system should primarily focus on preservation of capital.
• Are the results curve-fitted?  It is possible to come up with sensational performance figures by overfitting a system to a particular period of data.  However, outside of this (in your real life trading), the system will not perform.  Look for some disclaimers about performance figures - often the fact that results relate to testing rather than real world performance is disclosed.
• Is the way that the system works disclosed?  If not, it is a black box system.  You will need to have a lot of faith in the developer to trade a black box system.
• Does the system claim to have a special “secret” or exotic technique?  Almost all trading systems use a combination of a smoothing approach and some signals that are applied to the smoothed data.  The algorithms of most systems are readily available.  Proprietary systems are generally not offered to the public because they represent a significant investment.  If you had the ultimate low risk trading approach developed by a team of PhD statisticians, would you be selling it for $49.95?
• Over what period is performance measured, and how does it perform over that period?  Ideally, it should behave consistently over a period of years.  By consistent performance, we mean that there should not be massive losses.
• Is the system practical to trade? A system that requires 30 or 40 trades a day will require a lot of work and brokerage.  If the system needs $10 million of trading capital, it is not practical for most traders.  If you need to watch your trading position day and night, it may be difficult to stick with the system.
• Are you comfortable with the drawdowns?  A system with significant drawdowns of trading capital may test your faith and your bankbook.  As mentioned, you should look for something with a smooth equity curve.

If you are looking for a site that objectively evaluates stock, forex, futures and option trading systems (and lets you invest with them), check out Collective2.com.  It tracks the recommended trades over time and rates each system and you can also read user comments on each system.  This approach is preferable to putting down your money for a system where you have no way of determining its performance in real life conditions.

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Tags: scams, trading system scams

This entry was posted on Tuesday, March 18th, 2008 at 7:22 pm and is filed under Scams to Avoid. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.