Friday, February 11, 2011

Newsletter on Trading Systems (from C2)

In case you missed this newsletter from Collective2 (C2), we thought it was an interesting look at why some trading systems ultimately fail. The recent volatility in the futures and currency markets in January and early February caused some losses for trading systems, and we recently wrote a related article. I use Collective2 as a third-party tracker for trading systems.

Here is an excerpt from the Collective2 newsletter. Please click here for the entire article.

Three trading systems that failed

and what we can learn from them

A lot of trading-system sites like to brag about how people made money on their site.

... Every now and then we review bad trading systems on our site.

Why our obsession with failure?

Because failure, more than success, is interesting. Not just in a snarky, let's-kick-people-when-they're-down kind of way. When trading systems fail, it gives investors a chance to ask questions. Were there warning signs that should have been heeded? Is there anything that these failed systems have in common?



The point of reviewing these three systems is to learn from mistakes. The best kind of mistakes to learn from are the ones that other people make. (Learning from your own mistakes, while a powerful pedagogical method, hurts like hell.)

So what did we learn today?

  1. Trading systems that engage in Martingale strategies can look good for a long time. But they always end the same way, and it's never pretty.
  2. System developers that talk about golden harmonics and astrology and bird entrails should be treated with skepticism.
  3. Even supposedly "low-risk" strategies have risk. There is no such thing as a free lunch.

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