I was doing a post mortem on the Black Dog, which has a striking resemblance to quite a few other systems over the past few months. In fact, it is a poster child for wayward systems:
1) New system active for 8 weeks, and for whatever reason, plows ahead. Many people get excited, and chatter about it.
2) Then people start subscribing, and it stalls out.
3) People start complaining, and system advisor falls off the radar.
4) System meanders for some period of time, as people hope for resurrection (or as in this case, a blood clot gets to the brain, it has a stroke, and dies on the operating table).
Well, after having followed many, many, many systems over the past 10 years, I have seen this about 800 times before. I can sum up the phenomena of high-flying systems as 3 cases:
A) Like we learned in mid-May, many stock/index following systems are only doing well, because they caught a wave - when the market trends strongly, they crank up the leverage and ride. Some have already discussed those systems that "Hold and Hope."
The only thing that impresses me about an equity system, is someone whose shorts are profitable in a rising market (or longs are profitable in a downdraft). THAT is someone who may know how to time the market!!!
B) When you have 500 systems, FIVE are guaranteed to be in the top 1%. If you flip a coin 8 times, 0.2% of the time, they will be all heads or all tails. The coin for that run isn’t lucky, it is called probability.
This means that when you log into C2, SOME of the systems that are on top, are there because of probability. So when people complain, “how come it stops working when I subscribe?” It is because systems that are on top due to blind probability, stop working because they didn’t work in the first place. If they made, say, 25 trades, they just happened to accidentally be long or short at the right times more than other systems. There is wisdom in the one who posted that he needs to see at least a certain number of trades before he takes it seriously.
That is why when I see a promising system, I watch it for a bit, to see if it stalls. A good system will mostly keep working, although all systems will get pneumonia from time to time.
C) The darned system actually has potential. The trick of getting value, is to sift through a lot of dirt, to find the occasional nugget. People who go out prospecting with metal detectors find a lot of gum wrappers and beer tabs, before stumbling onto the occasional Mercury dime or silver earring.
But if it passes this test, get in. Because changing market geometry is likely to sink even systems that do have a market advantage. Of all the few systems that I have personally followed that actually seem to work from the past, I can only say that 2 still seem to have value. And both went into year long funks…
If I combine your (unique) system statistics and rating as shown on C2, I conclude that as of today at least 73%* of all systems offered on C2 are expected to make people worse off than just staying out of the market. It seems the odds for a subscriber are pretty bad …
* (758 - 100) / (1000 - 100)
actually they are much worse. Some people think that trading is a zero-sum game, with the winner taking what the loser gives up.
In truth, it is a negative-sum game where in addition, slippage, exchange fees, taxes??, commissions, errors, trading fees, stress/drawdown, missed opportunities, not having a job instead, capital not earning interest or being in other opportunities, banking/transaction fees, charting & other services, personal time invested in following systems and the market, and general risk exposure can take a terrible toll on someone who thinks he is breakeven.
If I combine your (unique) system statistics and rating as shown on C2, I conclude that as of today at least 73%* of all systems offered on C2 are expected to make people worse off than just staying out of the market. It seems the odds for a subscriber are pretty bad …
* (758 - 100) / (1000 - 100)…Huh? Where does this come from. What if any meaning does the "rating" have?
And why would it surprise anyone that most systems fail?
“Collective2 rates every trading advisor in its database and assigns a score between 100 and 1000.” (click “Collective2 Ratings” on the left)
I assumed that the ratings are roughly evenly distributed between 100 and 1000 (if that’s not the case, the 73% and what follows below is meaningless)
If you use the formula (<your rating> - 100) / (1000 - 100), with 100 and 1000 as the low and high endpoints of the scale, you know what % of the vendors perform worse than you do–at least as judged by the “C2 rating”…
The interesting thing about Ross Canfield’s system is that it hasn’t been in the market (yet), while having a rating of 758. So supposedly any vendor with a rating below his’ performs worse than a system with exactly zero profit and zero risk.
I agree that it’s not surprising at all that most systems fail.
the reality is, that the rating systems seems only to have a partial correlation with reality.
I get 758 without making a trade. Others who seem about the same, may only get a 60 or so…
"In truth, it is a negative-sum game where in addition, slippage, exchange fees, taxes??, commissions, errors, trading fees, stress/drawdown, missed opportunities, not having a job instead, capital not earning interest or being in other opportunities, banking/transaction fees, charting & other services, personal time invested in following systems and the market, and general risk exposure can take a terrible toll on someone who thinks he is breakeven. "
Everything you listed above is 100% true about the reality of trading (investing) but has nothing to do with certain markets (futures, options) being zero-sum.
Zero-sum game has a specific meaning. If you start redefining it to include the (external) items you mentioned then nothing could ever be zero-sum.
Ross, I take your skepticism and analysis quite seriously. It’s bad news, but it’s also good news. What if C2 were full of systems capable of delivering a reliable performance, great results and good money management? What chance would we ever have of making money? (Whether as system vendors or in the market, against such people.)
Easy strategies like Hold and Hope don’t reveal any method at all. Just luck. I think a system that is both long and short, and profitably long in a declining market, or profitably short in a rising market, as you said, deserves to be looked at, for a few months, to make sure it really works.
If you have been watching systems for over 10 years you have a lot of patience. Actually, buying into a system, is only another kind of trading, where subscribers trade the system instead of stocks or futures. So, they jump on any rising star without studying the fundamentals. How large the drawdowns? How large the losses, vs. the wins? A system with a loss of $25,000 and a couple of hundred scalping wins around $350.00 will show a nice equity curve, but with slippage and with the fact that many would have bailed out of that 25,000 position when it was in a 75,000 drawdown, (in real life, in other words,) it’s another thing.
So, picking a system, like picking a stock, involves studying the fundamentals, and reading the fine print.
> The interesting thing about Ross Canfield’s system is that it hasn’t been in the market (yet), while having a rating of 758.
“Ross” has the ranking of 758. It has NOTHING to do with his system.
For example “Black Dog” has a “Collective2 Rating of 991” with HUGE risk and a negative Cumu $.
>So supposedly any vendor with a rating below his’ performs worse than a system with exactly zero profit and zero risk.
Wrong. There are slightly profitable systems with very low “rankings”.
> If you use the formula (<your rating> - 100) / (1000 - 100), with 100 and 1000 as the low and high endpoints of the scale…
Here is my formula:
(BS/BS - 100) / (1000 - 100), with 100 and 1000 as the low and high endpoints of the scale…
If you would like to do more “research” look at your own
rankings and “Science” Trading track record:
Science Trader has a Collective2 Rating of 746.
Cumu $ ($13,082)
So we then agree that these rankings are meaningless?
I suggest that everyone looks at average win size compared to average loss size and works out the breakeven win%.
The system being discussed here has an average winner of $4181and an average loser of $11890 thus the breakeven win% is 74%. This means that if the system generates less than 74% winning trades it will lose money.
Obviously any system with a breakeven win% over 50% is going to lose money in the long run if you believe that a long-term win% above 50% is not possible.
In my opinion a ‘good’ system that has longevity will have an average winner at least 1.5 times an average loser and therefore will breakeven with only 40% winners. This is what my proprietary trading is designed to do, so I’m obviously biased in this regard - I don’t want to start a big argument, just wanted to give people some clue as to why these 80% winning systems inevitably crash and burn - it’s because their exit strategy is designed to be right (i.e. generate winners) rather than make money (i.e. have winners much larger than losers).
Paul King
PMKing Trading LLC
www.pmkingtrading.com
Bingo.
I have never been very fond of systems that rely on a few big winners. The only that that EVER interests me is an advisor who shows some true ability to time the market. I have seen plenty of those 3-run homer systems go belly up.
There is a group that says "you can do random entries and still make profits with money management." I consider that complete BS.
If it were that simple, then which market you pick and everything else is irrelevant. Pork bellies, eminis, Hewlett stock and Yen would all be the same.
We would just crank up the computers, and automate the precise money management, and make the moolah. Unfortunately, I rarely see the truth in this - the monthly and annual CTA rankings seem to never hold this up, let alone C2. People are long on theory and short on proof.
I didn’t say anything about the relative frequency of winners versus losers, only the average sizes - I agree that systems with few large winners that attempt to make up for all the small losers are difficult for most people to trade, and usually have a problem with position-sizing too big to survive the inevitable long string of losers.
We obvioulsy have fundamentally different beliefs about how to make money trading so it is probably futile continuing this conversation. For example, I believe that win% is determined by exits not entries, and has little to do with any predictivate ability or skill in market timing.
I also believe the random entry BS to some extent - I have systems that make money whether you reverse the entry signal or not - they are designed so that the exits and position-sizing meet my objectives - the entry in these cases is designed to be in a market when it is most liquid - it is not designed to have any predictive value. Most people would have a problem having confidence in a system based on these concepts and beliefs.
Good luck in your trading.
Paul King
PMKing Trading LLC
www.pmkingtrading.com
