You may have noticed a message on trading track records referring to ‘hypothetical performance’ …
What is a hypothetical performance?
It sounds a bit suspect. But, is it any less reliable than a real track record?
Should you trust hypothetical or real-life results?
I spend a huge amount of my time looking through other people’s trading results. And I often ruffle feathers as I pick fault with them, and query decisions. But I have very strong opinions on what is a true track record. And anyone looking to invest in a trading method wants to know exactly what they can expect, without fluff, errors, smoke or mirrors.
The benefits of real-life results are that they will:
- Include spread and overnighting costs:
A hypothetical track record may assume that you get in and out of trades at a mid-price read off a chart, rather than the actual buy and sell prices. Plus, they may not include other costs of running trades over multiple days.
- Take into account slippage:
It would be nice to assume that we’ll always get into and out of trades at the exact price we’ve requested, but that isn’t always the case. A real-life track record will include these blips. (Bear in mind that ‘real-life’ trading on a demo account will NOT show slippage.)
- Factor in practical considerations:
This is especially relevant in short-term trading methods, where we’re only after a few points at a time. A hypothetical track record might assume that everything happens instantaneously. For example, let’s say a trading method requires us to spot a pattern on a 1-minute chart, and place our trade in time to catch a full 5-pip move. The reality of trading is that we could have already missed several pips before we’ve got our trade on (while the rest is eaten up by spread costs). Without real trading, we don’t know if a hypothetical trading system will function day to day.
But there’s a big problem with real-life results
Let’s say that I’m telling you about my amazing new trading method that’s made me £200 in the last week. I place a single trade each morning at 6am. But on Tuesday, I overslept and forgot to place my trade. I want to be completely up-front about my results, showing them real-life – so I haven’t included Tuesday in my results.
How helpful is this track record for anyone judging performance? (Admittedly, a week isn’t long enough, but this is just for illustration.)
Now let’s say that I’ve checked the charts, and in fact, Tuesday’s trade (if I’d been awake in time), would have been a big loss, wiping out that £200 profit.
Is it really honest and up-front not to declare that?
Real-life trading accounts are littered with these kinds of discrepancies. Yes, they show the reality of day-to-day trading, but a rules-based trading method can’t have space for all this wooliness.
This is where hypothetical track records excel
A hypothetical track record does not exactly match any single trading account.
It will never oversleep … or break its own rules.
It won’t accidentally put the wrong profit target on, or the wrong staking level.
If it’s told to compound returns, it’ll reinvest every penny, and will never withdraw funds to pay for a holiday.
The most important thing about a hypothetical track record is that (where there are clear, objective trading rules), it can be achieved by anyone. You don’t need to ‘get lucky’.
So, if on my live trading account, I’ve accidentally put the wrong stop level in, and been stopped out before I should have … that may be my personal history, but in terms of the track record for that trading strategy, I’ll record what the result would be if I’d followed the rules correctly (which is what other traders would do).
Getting the best of both
I hope what I’ve shown here are the benefits of real-life trading records AND the benefits of hypothetical trading records.
And what I want to achieve is the best of both worlds.
Which is exactly what I demand of any trading history I build up.
Here are the rules I require of a track record:
- trading on a live platform, so spreads, slippage and real-life time constraints are all factored in.
- hypothetical results recorded, so any missed trades or user errors are removed from the track record, as these won’t be replicated for other users. Instead, results are recorded as if the rules were followed to the letter.
What about staking plans?
In the real world, as a trading method starts showing profits, I’m likely to add further funds to it.
I might start trading with a few hundred pounds devoted to it … and gradually up this as my confidence in it grows, until there are a few thousand.
But if I try to show this in my track record, it becomes very messy.
When I say, look, I started with £500, and now I’ve made £10,000 … but then I added £5k in August … and another couple of £thousand in September …
It’s hard to fathom what’s gone in, and what the true percentage profits really are.
That’s why I’d favour a hypothetical staking plan – one that’ll either ALWAYS do fixed risk, or one that’ll ALWAYS compound. It just needs to be consistent, and trackable. It’ll assume that I started with a set amount, and built from that.
For me, this is the best way to show exactly the kinds of profits on offer.
So, what kind of results am I recording?
There’s a huge difference between correcting a few errors on live forward trading … and curve-fitting back-tested results.
The results I record for any trading system I’m following or developing would be classified as ‘hypothetical’ – they won’t exactly match what’s in my trading account.
However, the results will be directly based on what’s achieved on a LIVE trading platform. (Not a demo platform, where results are often different.)
I firmly believe this is the fairest, most honest way to present results – and the most useful to anyone looking to judge performance. Without this process, you can never really know if your strategy is any good for you.
To enjoy more content and get it faster Follow @TradersBulletin