Exposed: 3 trading tricks the “gurus” use

A lament I hear again and again from Bulletin readers is:

“How do I know which trading strategy to choose?”

As traders – with the equity market in its current shape – it’s never been more important to get our trading techniques sharpened, so we need to keep on the look out for the best new trading ideas.

However, it feels like we’re constantly being bombarded by the “next big thing” – how are we supposed to spot the gems from the junk?

Today I’d like to take a look at some of the wild claims made by “trading gurus” – and how you can tell which are genuine, and which are a load of fluff.

The first filter – is it right for you?

First of all, there are a few questions you can ask yourself. If you answer “no” to any of these, you can safely walk away …

– Can I make the time commitment? If a trading system requires that you spend 8am–midday glued to your computer screen, and you have a day job, chances are that it’s not for you.

Likewise, if it involves placing a trade at 6am each morning, and you’re more of a night owl – it’s unlikely that you’ll manage to stick with it.

– Do I have the necessary funds? Some systems require a large initial investment, especially if they use wide stop losses and require you to hold multiple positions at one time. Check what funds are required.

– Does it come with any guarantee? If the person or company selling this system doesn’t have enough faith in it to offer you a guarantee, then I can’t see any reason why you should have any faith in it.

– Do I trust the source of this strategy? Do the sellers include full contact details? Are they a registered UK company? If you can’t track down the company, then you may have problems fulfilling the guarantee.

So, if you’re happy with your answers to these questions … let’s move on to the interesting bit – the profits!

The second filter – are the claims genuine?

£25,000 in your first month …? £300,000 by the end of the year …? £1,500 by tomorrow morning …?

Anybody who wants to sell something, will want to show it in its best light – that’s fair enough. BUT many trading products are downright misleading in their claims.

Here I’d like to show you the tricks they use – and how you can get to the real bottom line …

Trick number one: Crazy staking plans

Sure, you might have £1,500 by tomorrow morning if you were prepared to risk £1,000 – and you won! Yes, you may have made £300,000 in the next six months if you’ve a spare £100,000 to spare today and are willing to take some hefty risks with it.

These big numbers sound very tempting, but taken alone, they tell you very little about the profitability of a trading technique.

You’re better off paying attention to the percentage gains that you can make – and bear in mind that they may be risking a greater percentage of their pot that you’d be willing to do.

Trick number two: Financing charges

Do they include the cost of the spread, slippage and the financing charges in their track record? More often than not, these costs aren’t factored in and will make a significant difference to the returns you get.

Trick number three: Back testing

No doubt you’ve heard the saying that “hindsight is always 20:20” – and nowhere is it more true than in trading histories!

Back testing is a dark and murky area of trading records, and I’d like to throw some light on it here …

Past imperfect

Back testing is the process of applying a trading technique to historical data in order to verify how it would have performed in that period.

Sounds fair enough – but the simple fact is that because of the knowledge we have about the past, it’s far easier to create a profitable system that will work on historical data than one that’ll work in the future.

In fact, if I plugged some numbers into the software I have on my computer and applied the “optimization” feature – I could probably come up with a trading strategy that would look like a great little earner – based on purely back-tested results.

How would I do that?

I’d run through the charts, and find the optimum trading times, I could hone my profits targets, fiddle my stop losses – and miraculously score again and again.

In fact, I can even introduce some new trading rules to explain away the days when the market misbehaved. (Like “Never trade on a Tuesday when there’s a letter ‘r’ in the month”!)

“Past performance is not a guarantee of future results”

I’m not suggesting that there’s no place for back testing – but it is no substitute for testing a trading strategy in the real market.

Even if I apply the strictest rules to my back testing, it’s hard to ignore the things I know about the timeframe – the general bearish or bullish nature of the markets … or the volatility of those months.

Nothing beats strict forward testing of trading results.

If I see someone flogging a trading strategy with a handful of months worth of backtested results – I run a mile. And I’d suggest that you do too.

Seeking perfection

What I’ve laid out above are some pretty stringent requirements.

In Trader’s Bulletin I like to draw your attention to the strategies that best meet these demands, but I’ll be honest with you – it’s unusual to find a trading technique that ticks every box.

Even comprehensive forward testing can’t guarantee that a system will continue to be profitable in the future – but at least you know where you stand and that it hasn’t had the “spin doctor” treatment.

Of course, with trading – there is always an element of “suck it and see”.

Related posts:

The 10 tests of a good trading strategy How to choose the right trading strategy