I have now been offering training courses to both individuals and corporate clients for nearly 15 years.

One aspect of my dealings with potential clients has always intrigued me. In a nutshell it is that  individuals will contact me and discuss training. They will then choose not to move forward with me and effectively disappear off the radar for two or three years. After that prolonged period they will then often re-contact me and book a training course – pretty well out of the Blue and with little further discussion!

Generally the story I hear from them is pretty much the same. Namely that in the intervening period they had indeed pursued trading and had attended several other training courses or purchased products and services. The results during that period were at best breakeven and  often very much worse where they incurred significant trading losses and wasted a lot of their own time in the process.

When I investigate their experiences there are generally two common paths that they have taken:

Firstly there are the people that simply go for the courses or products that make the biggest promises. Ie start with $500 and make $5 million by the end of the year. Needless to say these courses or products are a complete rip-off. The promises or assertions that they make are completely false.  The vendors know this when they sell the product and so does anybody with any trading experience whatsoever. Typically those types of products are therefore pitched at absolute novices who have zero experience and consequently no way of knowing any better. The solution to this is if people are promising outrageously high returns at outrageously low prices really common sense should tell you that it is just a straight con.  For further information read my PDF “how to avoid the marketing men”. It is however quiet surprising how so many novice traders keep moving from one of these con merchants to another without apparently realising their mistake.

The second path that people often take first is to go to  “the big-name courses”. The purchaser  draws confidence, quiet understandably, from the fact that they are dealing with a big national or international company with an impressive website and many different products and services.

Such companies are often “training” thousands of traders each and every year. The websites and the information on them is extremely compelling. Often they are fronted by a particular “big-name “trader””. I’ve put the word trader in inverted commas because almost without exception if one looks a little deeper we will find that that “trader” does not actually trade for himself or worse still when they did trade they actually lost money.

It is very easy for would be purchasers too carry out this sort of pre-purchase due diligence research but most of us are fired up with enthusiasm and have a tendency to just to believe what we are told. This is especially the case with these large companies with massive advertising budgets. They are extremely credible and appear to offer a proper quality “education”. It is quite understandable that traders with little or no previous experience have a tendency to sign up for these types of courses first. They see it as the safe bet and are drawing confidence from the credibility of a big organisation.

In the “avoid the marketing men PDF”  I covered how asking a simple single question  would protect you from making both of the above mistakes.

Another way to avoid the “big-name course” trap is to simply…………… apply a little common sense !

By this I mean almost invariably these courses are offering a whole host of additional products and follow-on services. Often there is for instance a bronze trading course, a silver trading course, a gold trading course, Platinum trading course etc together with umpteen additional products and services that you can purchase from them. You know the sort of thing special indicators, special software, additional training modules, monthly subscription services, signal services, additional trading systems. All of these and many more come, of course, at additional cost on top of the basic course fee.

So what do I mean by applying a little common sense ?

Think it through for a second.  If you are subscribing for their bronze trading course which promises to teach you to trade then why do you then need a Silver trading course let alone a  Gold trading course ! Why if they really are going to teach you to trade successfully on that first course do you need to then purchases all these additional services and educational products ?

To put it bluntly if the first product they offered worked there would be no need for most of the subsequent products !

These big trading educators are geared up to selling products and making profits. They are not wonderful human beings trying to benefit mankind they are businessman trying to make as much money as they possibly can. There is absolutely nothing wrong with this so long as you recognise that fact and understand it for what it is. Their best interests are served by you NOT learning to trade. That way they can then “up sell” a plethora of new and different, and often more expensive, products to an existing customer base.

Their best financial interests are absolutely not served by initially teaching you to become a successful trader – you would go away and spend no more money with them. Their best financial interests are served by keeping you on the hook and keeping you jiggling around trying to reach that next piece of bait that is dangled in front of you. After you first bronze course they now tell you that “real” success comes when you purchase the silver course and then all of your problems would be over. Of course after the silver course comes a gold course and so it goes on. This “soaking” of existing customers for more and more of their money is a well  established business practice.

There is a further serious problem with this particular business practice with respect to trading education. In order to keep you “biting” they have to present to you what may well be an unrealistically optimistic picture of what you can achieve from using their services. This means that very very often clients are only given one side of the story. They are told all  that is wonderful about trading and nothing about the inherent difficulties. I am a firm believer that it is absolutely imperative to explain to people the inherent difficulties of making money in trading. It is only by knowing where the potholes are in the road that you can avoid falling in to them. The real danger with the up selling concept is that it deliberately glosses over the difficulties.

So if you go to a website and you see a mass of products available to purchase, understand that this is not a good thing !  Rest assured they will be doing their level best to make sure you buy every single one of those products.

So are these big companies all conmen? Of course not. But they are, first and foremost, businessman seeking to maximise profits. What do you get on these big courses? Well you get taught ABOUT trading. They will teach you about indicators and how indicators should be applied etc . That’s fair enough, we all have to acquire that basic understanding from one source or another. In truth it is generally not much more than you could have got from a £50 book on Amazon.

The real problem is that educating people about trading is absolutely not the same thing as teaching them how to make money from trading. The two things are entirely different.  Be aware that the big trainers teach people ABOUT trading not actually how to MAKE MONEY FROM trading – the two are very different things.

So after one of these courses you will probably have a much greater understanding about trading but almost certainly be no closer to turning that knowledge into profits. See my PDF on this subject.

Finally if having read the forgoing you still do not accept my views then at the very least it should still have raised another simple question in your mind that requires an answer:

If indeed what I say is incorrect and these big-name courses are in fact churning out successful traders by the thousand ……. Then where are they all ? 

We should  be tripping over them every time we go to Tesco’s. Everybody should know a friend of a friend who is making a fortune from trading – but we don’t do we !

If you want to know ABOUT trading then buy a few books from Amazon. If you want to make money FROM trading speak to a professional trader who is not trying to earn his living from just teaching courses or worst still upselling countless products and services to you.

If further proof is required in one very famous instance one of the big name courses was challenged to produce a single student from the thousands of students they had  trained that was actually making real serious consistent money from trading – they could not provide a single student !

The best courses are generally those that are not offering a mass of extra bolt on products and services. You need to be dealing with somebody who does not have a vested financial interest in making you come back and spend yet more money with them.

So whilst it always surprises me a little when people disappear off and do a big-name course in preference to my own training course I am confident that in two or three years time many of them  will come knocking at my door somewhat chastened and always significantly poorer.

What is a shame is that they did not first read a few of the PDFs that I have produced over the years as these expose many  of the tricks of the trade and show you how to avoid repeating the mistakes of others. That way novice traders could save themselves wasting often thousands of pounds in training course fees, further thousands of pounds in trading losses and often hundreds and hundreds of hours of often wasted and misdirected study.

Still I can say exactly the same thing about most of the advice I give to my  children !

Sadly they have to learn by their own experiences and repeat the same mistakes I made at their age. They do this no matter how hard you try and provide them with a shortcut  – namely learning through somebody else’s painful experiences rather than just repeating the same mistakes.

The problem is children cannot be as wise as their parents, who have so much greater experience because they have been around a lot longer (been there, seen it, done it and got the T-shirt if you like).  In exactly the same way, novice traders cannot be as wise as established profitable traders. So most children and most novice traders I suppose are condemned to walk a much longer and more problematic path than is in fact necessary !

Quite rightly there is much talk at the moment of whether we are at or close the top of the current bull market and hence about to enter bear market.

I thought it might  be helpful to provide a few statistics and facts on both bull markets and bear markets. Whilst these are all very boring statistics I urge you to read on as they might just save your financial life one day.  These statistics all relate to the USA S&P index  covering the period from the 1920’s to the current time. Statistics for the British FTSE would be very similar.

A bear market is defined as a fall in the index value of at least 20% from a previous high.

There have been on average around one bear market every four or five years. They are not at all uncommon although of course they do not occur like clockwork every four or five years.

There have been 16 bull markets since 1929. Most bull markets last between 2 and 5 years with an average duration of around 3.5 years and all bar 4 have lasted less than five years.

The longest bull market in modern history (commencing in 1990)  lasted slightly over nine years. The current bull market is now the second longest bull market in modern history and has lasted around 7 ½ years

The average price earnings ratio over modern history is around 17. The current price earnings ratio is around 23. The S&P would need to fall by around 30% to get back to its average P/E ratio.

When a bear market does occur the extent of the decline is generally proportional to the extent of the rise that occurred in the preceding bull market. I.e. big bull markets tend to roll over into becoming big bear markets.

Almost always the bear market will take back at least 50% of the previous bull market run up. The smallest ever give back in modern history was around 30% of the previous bull market run up. There have been  5  instances in modern times where the  bear market give back was actually greater than 100% of the preceding bull market run up.

Bear markets are typically over quite quickly with over 50% completing within 12 months and all bar one bear market having completed within 24 months

Bull markets tend to be relatively slow ponderous affairs whereas bear markets are often quick and very savage affairs.

Whilst there is certainly no guarantee that markets will continue to act as they have done historically that probably is still the way to be betting.

Boring statistics I agree but they should give us all food for thought.

A recent blog explaining that the S&P index is now at one of its most extreme overbought and overvalued levels since the 1920s elicited many responses.

Firstly what I found interesting was that very few people actually took issue with the basic premise that yes indeed the S&P is extremely overvalued at these levels.

The debate was more about what steps one should take, if any, when prices are at these historically very elevated levels.

The basic argument against my “defensive” stance appears to be along the lines of “I don’t care if the market is overvalued because at the first sign of trouble I will be getting out –  more or less at the top”

Historically the problem with this “plan” is that  when everybody is running for the exits at the same time only a few can make it out.

This is because many participators will be referring to the same, or very similar, levels of support and resistance and therefore when prices penetrate those levels there is often a stampede for the exits – think 1987.

What also happens on sudden falls in the stockmarkets is that people’s attitude to risk  changes in the blink of an eye.  The crowds attitude suddenly switches, in an instant, from  being “risk on” or extremely bullish to “risk off” and extremely bearish.

When this happens everybody’s first concern is to get out of risky assets and into safe assets, such as cash, irrespective of the returns either are offering. Our priorites swing  away from how to make more money to how to protect what money we still have.

This rapid change in the risk profile of a large group of  participators (for instance all those using margin debt to finance speculative positions) creates a buying vacuum which in turn leads to sudden  uncontrolled drops in the market (more sellers than buyers if you like). The market falls precipitously  as it tries to find a new equilibrium level.

It is a bit like when an aeroplane hits an air pocket. Everything seems fine then suddenly without warning the plane  drops more or less vertically.  Again think of 1987 or certain days in the 2000 and 2007 meltdowns or the more recent  “flash crashes”

When you do get a buying vacuum prices can fall dramatically 10 or 20% in very short periods of time indeed. Many long-term investors who had decided to exit on the first small drop suddenly find that “small drop” is in fact a 15% fall and now hesitate to pull the trigger and realise such  a large loss.

At this stage cognitive biases also  tend to take hold of our thinking and often the gambler’s bias  takes over which is where people are so reluctant to take a loss they are prepared to risk or gambler ever larger sums in order to try and prevent the crystallisation of that original loss.ie the tendency to be prepared “double down” hoping for a rebound is a classic example.

We also have a tendency to “anchor” to the previous high prices. We now consider those to be the “correct” or “normal”  valuations and start to believe that the current much lower prices are simply a short term aberration that will shortly reverse.

These cognitive biases generally make us extremely unwilling to pull the trigger and take those initial losses that we had previously promised ourselves that we would happily swallow.

Then of course the next day the market falls a further 5%.  Now we would certainly grab yesterday’s prices with both hands, if offered them,  but it is too late. We are now even more reluctant to exit at today’s even lower prices. And so it goes on day after day. Very few private traders get out anywhere near market tops once the first fall has taken place, it is just too psychologically difficult to do so.

When you look at the way these down moves unfold from extreme overvaluations it really is quite terrifying.

We spoke in an earlier blog about the possibility of 50% falls similar to what happened in 2000 and 2007. A 50% fall in the market is equivalent to the market first dropping 25% and then dropping a further 15% before then finally dropping a further  22%.

The point is that it is very easy to say that we will exit at the first sign of trouble but bear in mind the first sign of trouble may be a precipitous down move. Also after that first 25% fall mentioned in the paragraph above all the commentators, with vested interests,  will be telling us that the market is due for a bounce, and only fools would be selling at these levels and that buy and hold is the only sensible game in town.  This re-enforces our own cognitive biases and we keep hanging on in the desperate hope of recovering our losses. Then the market takes its second leg down and falls a further 15%. Those previously bullish commentators suddenly do not sound so sure but advise us that the worst is over now. Finally the market takes its 3rd leg down and falls another 22%. Now everybody is of the opinion that the world will end and it can only get worse – so we finally and belatedly throw in the towel and sell – yes very close to the bottom !

It is a simple fact that in these big bear markets private investors do not get out at the top they almost always get out at the bottom.  In fact professional traders will tell us that one of the best signals of the bottom of a market is when the “public” finally give up, throw in the towel and exit.

This happens time and time and time  again. In every bear market were not just fighting the bear market we are fighting human psychology.

For those that have money in the bank the buying opportunities that then occur at the bottom of these bear markets are once in a decade opportunities. Sadly most participators won’t have money in the bank. They will  have money psychologically locked into a falling market and are unable no now take advantage of these once in a decade opportunities.

I repeat it is not that I believe the market is going to plunge tomorrow, simply that when it does inevitably roll over into the next bear market we will again revisit current prices and almost certainly prices significantly lower than they are today.

The really big  money making opportunities do not lay in capturing the next move up in already long in the tooth bull markets (if indeed there is even a next move up) but rather they will occur for those with spare capital held outside the market after the next bear market downturn has played out.

If you have a gunslingers mentality and think you can outdraw the market – good luck but  take care because the odds and historical precedence is most definitely not in your favour.

The S&P is close to all time highs.

Well that must be good news,  maybe we can look forward to S&P 7,000 this year or next year at the latest ? – I don’t think so !

By many historically reliable measures the S&P it at or close to its most overvalued level since the 1929 and 2000 peaks – and yet it keeps going higher.

Perhaps this time it REALLY is a new paradigm? – forgive my humour !

We are now in the second longest Bull market since the 1920’s and sadly all Bull markets come to an end ….eventually. Here is the kicker, when a Bull market ends typically it gives back around 50% of the previously made Bull market gains. On the S&P that equates to about a 30% fall from current levels. This is not the worse case bear market scenario this is just a run of the mill, ordinary, average typical decline.

Furthermore there is a correlation between the size of the preceding Bull market and the subsequent Bear market decline that follows. Ie the nastiest Bear markets follow the most exaggerated Bull markets. Many informed professionals are talking of a decline closer to 40% or 50%  when the music stops on this one.

So it may very well be that we could actually see S&P 3,000 before we see S&P 7,000!

To quote Baron Rothschild   “ I always bought too late and sold out too early” meaning of course that he would take the “safe” chunk out of  the middle of the Bull market and leave others to try and pick exact bottoms or tops.

Because profits and losses are asymmetric in such situations a 30% loss takes a previously made 100% gain and reduces it to  just a 40% gain

So a market that rises from say 100 to 200 (a 100% gain) will then hit 140 after a 30% fall.

Whilst a 50% loss will take a 100% gain back down to ZERO (100 up to 200 then less 50% = 100)  . Ie a 50% loss will take back all of the profits earned in the entire previous Bull market run.

Don’t think that can happen?  Well let us not forget that it has already happened (more of less twice since)  in the last 20 odd  years.

So what is the message in this doom and gloom post.

Well for those that trade their pension or  ISA’s or other significant accumulated capital the message really is that often it is not worth hanging in fully loaded trying to pick the exact top in an ageing bull market. As Barron Rothchild new all too well even somebody who gets out wayyyyyy too early say 20% before the eventual top will do a lot better than somebody who rides the trend all the way up and all the way down again.

Buy and Hold is always touted as the best route. But almost invariably by those that have a vested interest in keeping you fully invested  – such as the fund managers. How can a fund manager who earns his living from investing funds ever suggest that you are better off out of the market ?

So am I saying the S&P will immediately plunge tomorrow morning. Not at all but what I am betting is that by the end of this full market cycle (1 bull market + 1 bear market) we will certainly be seeing these prices and indeed much lower on the way down the other side of this particular  mountain. This is the time to become more defensive in anticipation of what most definitely is coming.

Reminds me of that old joke that if the light at the end of the tunnel is not an oncoming train then it is probably the Taxman’s Torch !  Well in this case it is a Bear market and it is thundering straight down the track at us.

Recently my attention was drawn to a legal case concerning a former trading tutor who was jailed for a not inconsiderable period of time for running a Ponzi scheme.

A Ponzi scheme essentially uses a portion of the deposits put up by new clients to fund the dividend/interest payments being made to previous clients. This creates the impression that the scheme administrator is indeed managing to obtain the often staggering returns claimed because clients are actually receiving the returns promised. In fact in the vast majority of cases the administrator is actually losing money in their trading but continues to make the interest payments from the new deposits coming in.

This situation can continue for many years as was the case with the Madoff scheme.

Ponzi schemes are very common whether they are created around property investments, collectables such as fine wines or classic cars or indeed forex or options on forex etc.

Because for a period of time the schemes are genuinely paying out the advertised returns it is almost impossible to positively identify a scheme is a Ponzi until it is too late and the whole house of cards is already falling down. By which time most of the money has been lost or spent.

Ponzi schemes are generally only ever uncovered when existing investors stop getting their promised payouts. In the Madoff case it was because significant falls  in the markets took place and investors needed to withdraw funds to cover losses they were making elsewhere. This caused a “run” on the fund and the hole was just too big for him to plug with new investors money.

For smaller Ponzi schemes it is more commonly the case that the administrator spends most of the money on a combination of financing his own trading losses and funding the extravagant lifestyle necessary to create the veneer of success required to draw in yet more depositors.

My own view is that often with small Ponzi schemes they do not start out as Ponzi schemes but the trader genuinely believes he really can obtain those returns. As trading losses mount they take bigger and bigger gambles and compound the situation and cannot then face the consequences. So gradually what started as perhaps a genuine, albeit unrealistic, investment scheme morphs into a Ponzi scheme. Some have speculated that this was also the case with the Madoff scheme.

In truth most Ponzi schemes you can spot a mile away:

Either they offer incredibly high returns that are far and away better than you can obtain from any established institution. ie 5% per month every month and often “guaranteed” as well.

Or

They offer relatively “modest” returns (maybe 1% per month) but the returns are incredibly smooth and lack the normal up and down volatility. Ie every month you receive around 1% irrespective of what the underlying markets are actually doing. Generally you will have no losing months. This is the method that Madoff used. The returns profile for such a Ponzi scheme will be far far smoother than is available from any of the established institutions.

Whilst  we cannot with absolute certainty  prove a scheme is a Ponzi ahead of its collapse the warning signs are always present which is that when you look at one aspect or another of the investment returns you draw in a sharp intake of breath  and think “wow that is unbelievable” – and of course not only is it unbelievable but it is also not doable !

Take care.

Undoubtedly one of the main reasons why traders fail is as a result of unrealistic expectations. This is not necessarily the fault of the traders so much as the industry that supplies them with educational products and trading systems.
The vast majority of websites supplying traders are run by marketing men, rather than real life traders, with the sole intention of making as many sales as possible. The claims made on those websites are designed solely to part the unwary from their cash rather than to provide any genuine or insightful information that could be used to build a real career in trading.
One of the biggest problems new traders struggle to understand is the lack of consistency of returns. We are all searching for that mythical rock  steady 100 pips per week trading method which simply churns out a nice steady wage every week of 100 pips. Sadly that does not happen in real life. It is not that we cannot average 100 pips per week (because we most certainly can and indeed very much more)  it is that we cannot consistently make 100 pips each and every single week. Often traders come into this business expecting to earn a regular weekly wage exactly as they did in their previous employment. That is not how it is –  unless you are a high frequency trader with millions of Dollars of technology helping you.
Trading is a real business and the way profits unfold in most business is often inconsistent and almost always with less consistency than  the wages that are paid to the employees. The analogy I like to give is that trading is a bit like being the owner of an ice cream van. In August you have queues at mile long and are coining more money than you can count whilst in December you may have no customers at all and are sitting in the back of the van freezing cold reading the Sun newspaper all day long !. Trading absolutely is like that, sometimes the markets gives you much more money than Frankly you deserve whilst at other times you can work very hard and get no reward at all. On average you may do very well but results for any  particular day can be more or less the toss of a coin.
The lack of consistency in trading can be overcome to a great extent by applying the specific methods taught on both our beginners intermediates course and the automated trading course but the truth is that we have to accept taht the variability of returns day on day or week on week will always be greater than we would ideally like.

The second point that normally surprises new traders is that exceptional returns generally require exceptional risks. Again this is not what the marketing men would have you believe. They would say that  you can start with $1,000 and turn it into $50,000 in a matter of months with little or no risk. The truth is many many more traders have started with $1000 and turned it into nothing in a matter of months than have pocketed 50 grand ! . It is not that it is impossible to make staggeringly large returns in this game, far from it, indeed people are achieving such feats every single day. Where the error in the understanding occurs is that new traders believe this can be achieved without assuming any commensurate risk. That is not the case. Yes you can make truly astounding sums of money trading Forex and futures in very very short periods of time indeed but you do have to be very aggressive to achieve this and also prepared to accept the losses that can come from such actions. The way in which you choose to compound up your capital is absolutely critical to your chances of success. On both the beginners intermediates training course and the auto trading course I teach you several  different position sizing techniques from the relatively cautious to the super aggressive day traders techniques that really can compound up your capital faster than you can imagine.

So for both consistency of returns and speed of capital appreciation it is not that the claims that you read about cannot possibly be accomplished it is that in order to achieve either you have to be approaching the problem from a completely different, much more fully informed,  perspective that comes only from a lifetimes study or having received a full and complete quality education from traders rather than marketers.

Most courses choose to gloss over both the difficulties and the risks inherent in trading as these of course do not sell courses. The problem is if they send you away without you fully understanding either or both of these then your chances of success are very much reduced.

The pro-trader courses really are different, they are specifically designed to both inform and educate and provide participators with a full complete and honest understanding of what is required to succeed in this business.

Having this approach to business certainly means that we lose lots of sales and indeed turn many others away but it does mean that those that attend the courses have a much greater chance of success than those that simply attend marketing men’s get rich quick seminars. It also means because we tell you the truth that we can sleep nights – which is a bonus for us !

Certainly in my experience one of the major reasons traders fail is over trading or if you prefer trading with insufficient capital.

You can overtrade whether you have $1,000 in your account or $1,000,000 in the account as overtrading is really about  trading with insufficient capital relative to the size of the positions and risk that you are taking on. So hedge funds are just as  capable or overtrading as you and I.  Long Term Capital Management is a classic example of a massive fund still being under capitalised and hence overtrading.

In systematic trading of emini futures contracts it is essential to establish a “stop trading” point in advance of commencing to trade the strategy. This is most commonly set as a maximum level of losses that you are prepared to suffer before temporarily or indeed permanently pulling the plug on the system. Often this will be based on maximum historical drawdown but it can be based on other factors such as falling average trade, increasing percentage or runs of losing trades etc.

Generally maximum drawdown is as good a place to start as we are in this business to make money, not lose it. For normal trading the capital you allocate to a particular trading system, under such circumstances,  should  be based on a multiple of maximum historical drawdown. Perhaps double or even treble maximum historical drawdown.

Often traders will either not know their maximum drawdown (or even attempt come up with a manual back test estimate) or trade with a percentage of that figure (say 50%) rather than a multiple. They will  then be apparently surprised when they hit a perfectly normal and predictable drawdown and run out of trading capital. Often just after they have been forced to stop trading  the system will then turn around and start making profits again. Newbie traders will  groan and mutter about the fickleness of the market (as they often do when individual trade stops are hit and then the market immediately reverses off them) but of course the truth is that they have not allocated sufficient capital and they have been “bounced out of the markets”  by what is nothing more than an entirely predictable  and easily forecast dip in the equity curve. Tight individual trade stops rarely work in trading and tight capital allocations often suffer from a similar fate on the larger scale.

It is therefore essential to understand the characteristics of the systems you are trading and the likely swings in the equity curve that you will encounter. Then allocate capital accordingly rather than either having no idea of what you might experience in terms of drawdowns or simply saying “well I will give this system and arbitrary $2,000”.  Although I am bound to say even that is better than starting to trade with no idea of where you will stop trading if things begin to go wrong !

Trading is as much about understanding  and working with the vagaries of the equity curve as it is about selecting entry and exit points.

Professional traders often derive their equity allocations in reverse. They know what their average expected yearly drawdown is. If they want to  keep that figure to say 25% of capital they can then derive the capital allocation by working backwards from those two figures. Ie if average annual drawdown is $5,000 and you are seeking to limit drawdown to 25% of the account balance then the  capital allocation should be $20,000.

Another way to calculate capital allocations  is to input actual historical results into a Monti Carlo simulator and run a series (maybe 10,000) simulations  to derive anticipated drawdown levels and  expected probabilities and confidence limits for each of those levels.

Included in the Protrader  emini course is a simple simulator for carrying out this type of testing plus a  trade randomiser for viewing the results.

We covered the Calmar Ratio in an earlier Blogg and I thought we should also mention the MAR ratio which is another much quoted ratio.

They are very similar ratios in terms of calculation but results can vary widely between them because they use different historical look back periods for the calculation.

They both measure return per unit of risk where risk is defined as the maximum drawdown. There are all sorts of other measure of risk that could be used but maximum drawdown is a simple measure and generally the one that concerns us most. Maximum drawdown is the worst dip from a previous equity high (peak) to the lowest subsequent low (valley). In other words if we start trading at precisely the worst point possible on the historical equity curve how much money will we lose before our account starts to turn around.

The MAR ratio is calculated by dividing the compound annual growth rate (CAGR) of a system since inception by its biggest drawdown. Whereas the Calmar ratio typically uses a 36month historical look back.

MAR ratio = (compound rate of  return)/ (maximum drawdown)

Calmar ratio = (36 month compound rate of return).( 36 month maximum drawdown)

So MAR is a longer term measure whilst Calmar is just looking at the results over the last 3 years.

Because of the great similarities many people believe the name MAR is some derivation from the CalMAR ratio (covered in an earlier Blogg) however the name is actually derived from the developers of the ratio the Managed Accounts Newsletter.

Clearly if we used a 36 month look back in both calculations then the two ratios would be identical.

So which is better ? Well it all depends on your time horizon. If you have a very long term time horizon then probably MAR is the best to use whereas if you are more of the sort of person who tends to ask “what have you done for me lately “  then Calmar would be more suitable.

For the sort of short term automated algorithmic trading  that we do then clearly we are much more interested in the shorter term results and ratios than the very long term.

There is of course no reason why we cannot adjust the look back to suit our own requirements. I tend to pay more attention to results over the last couple of years so often I will use a 24 month look back when comparing system performance. I would still  be demanding  adequate performance over much longer periods as well but certainly want  my automated day trading systems to be firing on all cylinders over the last couple of years.

Automated systems are essentially mechanical systems where the trades are now executed directly by the computer.

The rules for the mechanical trading method  can now be coded up and entered into a computer programme such that the program can perform all of the calculations relevant to the entries and exits and then utilise an integral order execution network to place and fill the trades directly. In other words the computer can be left completely unattended  to trade for you.

In theory with automated trading you can turn your systems on and go away for a holiday and leave the computer to diligently take all the trades according to the specified rules. Automated trading systems therefore have all the evidential advantages of mechanical trading systems plus they also  fully automate the entry and exit procedures such that no human intervention is required.

Most institutional money is now traded using  mechanical systems or more probably fully automated trading systems.

My own experience in trading suggests that for private home based traders automated trading should be the culmination of the  learning process rather than seen as a short cut right from the start of the learning process.

We have to start with discretionary trading methods so that we can learn about trading and complete our apprenticeship if you like. Once we have gained some hands-on experience and if  we are looking to make six figures a year consistently from trading then I think mechanical trading systems or automated trading systems are probably the way to go. This is because they are true evidence based methods. Through back testing they prove that the method would have worked for the last five or 10 years or whatever and this in itself gives the trader many many advantages over discretionary trading methods.

Automated systems have the edge over mechanical systems because they allow you to trade many more markets simultaneously and also trade on much shorter timeframes and allow the trading day to be extended much longer  than would be possible for a human trader. Imaging trying to monitor one minute price bars on  8 emini or forex instruments  simultaneously whilst also calculating and placing entry and exit orders, trailing stops etc. It would be impossible to do this manually whereas automated trading systems make this simplicity itself. They also have many other advantages such as they never get tired so can trade 24 hours per day which allows the trader  to “sweat”  his  margin money.

Many traders make very good livings trading just discretionary systems as we discussed in the previous Blogg. So there is no need to ever move past trading discretionary trading methods. However……….

It is always going to be difficult to prove  or precisely quantify the extent of the “edge” that any individual will get from a particular discretionary method.

This is because by definition results will vary depending on each individual’s interpretation of the method. Each trader will get different results depending on how skilled and experienced they are and precisely how they  interpret the rules.  Some traders may do very well with a method that they have truly mastered whilst other traders may do less well with the same method because they have not fully got to grips with it or lack the experience.

Mechanical systems get over this problem by using  very precise tightly specified  rules for selecting the entry and exit points which leaves no need for any additional  interpretation or judgement by the  trader himself.

A simple mechanical system might therefore say if it is Monday at 2pm and RSI is greater than  70  then buy the market and if it is Tuesday at 3pm exit the market.

This means that all  traders trading that system will  get  identical entry and exit points.  The trading process has, if you like, been  de-skilled and mechanised – which has many advantages.

With mechanical trading  once the market complies with all of the rules then the trader will manually enter his orders on the trading platform in exactly  the same way as the discretionary trader would.

Because the rules and  parameters are so precisely specified it means that such systems can now be tested and back tested over long sequences of historical market data  to show how they would have performed in the past. Such systems can now be properly referred to as  to as evidence based mechanical trading systems  because they can be proved to have worked over past data and the edge can now be precisely quantified in mathematical terms.

A second major advantage of such systems is that because they remove the “individual judgement” element from trading decisions they effectively “de-skill” the trading process to the extent that anybody that has access to the rules will get the same results whether they are a highly skilled and experienced veteran trader or a newbie with just a few months experience.

The  Pro-trader beginners/intermediates course includes a mix of discretionary and mechanical systems to offer you the widest possible choice of trading approaches.

The Calmar Ratio is a simple ratio used in the hedge fund industry to measure the return  versus risk  ratio between different funds thereby allowing a simple risk comparison of different funds results.

Whilst total return is of course very important what is even more important to most investors is the risk adjusted of risk normalised rate of return.

The Calmar is normally calculated over a 3 year look back and is given by the simple formula

Compound annualised rate of return/maximum drawdown %

The higher the Calmar ratio the better the risk/reward profile.

If  over a 3 year period the  annualised rate of return  of fund A was 30%  with a maximum drawdown % of  10%  then the Calmar ratio would be 3.

Whilst if the rate of return was 45% with  a maximum drawdown % of  30%  then the Calmar ratio would be 1.5.

Whilst  the  latter fund produces the highest total return (45%) it produces the lower Calmar ratio indicating greater normalised risk (in terms of return to  maximum drawdown) than the former.

An even simpler ratio that gives a very quick measure of pain versus gain for shorter term  emini trading systems such as those taught on the Protrader automated trading course is the Payback Months ratio.

In this case you take the maximum drawdown and divide it by the average monthly return over a specified period of time.

Assume a system averages $500 per month but has had a maximum drawdown of $2,000 then the Payback Months would be 4. This simply means that you could happily make your average monthly return for 4 months and then give it all back if you were unlucky enough to hit the maximum drawdown figure.

In the case of Payback Months ratio lower numbers indicate a better risk/reward profile. Therefore a  system where the Payback Months is 2 months is far superior to one where the ratio is 10 months.

Both Calmar and Payback Months  “normalise” returns relative to risk (as defined by maximum drawdown) and make it much easier to draw meaningful risk/reward comparisons between funds or systems that perhaps are generating widely  different levels of absolute return.

It is always essential to choose a  system that has a risk return profile appropriate to your requirements rather than just go for the one that makes the most absolute Dollars per Month.

The Pro-Trader courses offer traders a mix of discretionary, mechanical and fully automated systems in both our forex training courses and automated emini daytrading courses.  I thought it worth taking a couple of minutes to explain the difference between these three methods of trading.

Most traders initially start by using judgement based discretionary trading methods. With this type of  trading the trader accumulates a variety of data whether it is fundamental or technical and then makes judgments based on his individual personal interpretation of that data. He will then manually enter all of his  orders on to the trading platform . Discretionary trading  may involve monitoring markets on an hour to hour or even minute to minute bases or using simple “set and forget “  methods such as we supply – which do not require you to be glued to the trading screens.

Discretionary trading decisions may either be made based on  pure “seat of the pants”  gut feelings or  based upon some general interpretation of more detailed broad brush rules including the use of one or more indicators. For instance many discretionary traders may use an indicator such as MACD or RSI and pay particular attention when these are broadly  rising above certain levels or falling below certain levels etc.

The key feature of discretionary trading is that there is always a degree of personal individual judgement involved when selecting the precise  entry and exit points. This means that  actual results will vary from trader to trader depending on each individual traders interpretation of both the rules and any indicators being used. That quality of results obtained will therefore to some extent  depend on each individuals level of skill and or experience and how well or otherwise they have mastered the interpretation of the particular method they are using.

Discretionary trading systems are very flexible and often the rules can be simple to learn yet they allow you to rapidly start trading a multitude of different instruments and timeframes.

So one of the big advantages of using discretionary trading techniques is that generally  the same basic method can be applied to pretty well any market and any time frame of trading. The same method could for instance be used to daytrade emini S&P futures using say 5 minute bars whilst swing trading  say EUR/USD on say 4 hr bars.

All of the pro-trader discretionary trading systems are configured as “set and forget systems” where the trader will look for a particular defined setup and if that is present they will place the entry and exit orders. Once the orders are in the Broker monitors the trades  throughout the day and the trader can go about his normal business.

One of the most common questions that I am asked is along the lines of  “what do you think is going to happen to (insert as appropriate emini S&P, EUR/USD, Gold, FTSE etc) “

Peoples’s faith in my physic ability is indeed touching but none the less entirely misplaced.

There has been an immense amount of research into human beings ability to predict what will happen in the future and surprise surprise the research clearly shows that we cannot predict future events with any meaningful degree of statistical accuracy. This applies just as much to short term predictions concerning for instance  emini daytrading as it does to longer term predictions such as long term trend following.

In support of the ability to predict the future many financial tipsters and Gurus will often refer to a single spectacular instance where they were indeed correct.  What they do not say is just  how many predictions they made that were wrong before they hit that single winner. If you swing at a ball often enough sooner or later you will hit one out of the park in the most spectacular fashion.

Novice traders are often looking for a Guru (person or system) that will accurately and consistently tell them what is ahead. Sadly this is a hope which all the evidence suggests cannot be achieved with consistency over the longer term.  Certainly financial gurus come and go with great frequency and I am not aware of any that has really stood the test of time.

So if your trading strategy is to rely  the predictions of a financial guru you will almost certainly come unstuck somewhere down the line.

With respect to trading systems the fallacy is that they are also in some way predictive. This is of course not true. What a trading systems developer does do is:

Identify some form of historically repeating “bias” or “tendency” in the market. Ie for instance he may observe that if a market closes down big on a Friday night  and then continues this into the Monday session then there is a greater likelihood of the market falling further in subsequent sessions (which is indeed the case with US indexes).

He will then design a strategy that will take advantage of that bias by capturing more profits than losses if and when that bias  occurs and repeats in the future. They key point here is that the developer/trader  is not predicting that such a bias will continue to happen simply that if it does the strategy has been designed to take advantage of that situation.

So whilst that bias or tendency continues the system should generate profits for the trader. However if for any reason the markets changes and the nature of that bias changes or indeed disappears altogether then the systems will not perform because the premise on which it was constructed no longer occurs.

Sometimes the markets trade similarly for long periods of time allowing systems to capture good profits and sometimes…………….the markets … don’t  !

What is therefore essential with all trading systems and in particular fully automated currency or emini  trading systems is to have a set of rules that tell you when to stop trading that method (if the bias  is seen to disappears or changes) and also when to restart trading again (if the bias re-emerges). This is an area that many traders fall down on.

In my experience simply hoping that a system will continue to work into infinity is unrealistic because it implies that the market itself will never change and of course it does.

Fibonacci numbers are much used in both forex and futures trading. Honestly if I had a Dollar for every time somebody has said  words along  the lines of “and it got nearly right on the n% retracement – it was amazing” .

So it was interesting to read some research that has recently been published on whether Fibonacci levels can be scientifically proven to be hit more frequently than would be expected by pure chance.

The research was carried out by the academic Roy Batchelor, HSBC Professor of Banking and Finance at Sir John Cass Business School and PhD researcher Richard Ramyar.

They make the very true point that when trying to test the validity or otherwise of such concepts the problem is often that traders fail to specify their trading rules precisely enough to be scientifically tested. Traders tend to report outcomes using phrases like “price nearly got to”  “price went just slightly past …then” etc. Such descriptions of  trading results and outcomes is far  too subjective to satisfy rigorous external verification.

To cut a long story short our trusty scientists  tested daily Dow data from 1915 through to 2003 to see if after a  long trend retraces is the magnitude of the next trend entirely random or does it respect support and resistance levels  dictated by Fibonacci ratios or round numbers.

It often does seem that price does respect (or at least nearly respect) the predictions from Fibonacci levels and many other indicators such as RSI or MACD etc.  Certainly when you simply “eyeball” the charts such correlations look very real … but what did the  scientific testing  tell us ?

Their conclusion after a great deal of testing was ….. “Our conclusion must be that there is no significant difference between the frequencies with which price and time ratios occur in cycles in the Dow Jones Industrial Average, and frequencies which we would expect to occur at random in such a time series”

So the answer is No folks (at laest not for daily data on the Down over that test period) – any correlations are no better than random  – sorry about that.

This does not  surprise me greatly as I have done a great deal of computer testing on all sorts of indicators and that would be my conclusion as well (on virtually all indicators not just Fibs) . Sure sometimes indicator A gives a great buy signal but then again sometimes it does not !

Although please note that whilst something may not “work” in the precise scientific sense that does not mean that it may not still be useful to traders in a more general sense.  See the later article “why are people convinced Fibonacci works”

The great thing about algorithmic trading is that we can do our own testing and do not need to rely on the good Professor.

The litmus test for Algo traders is very simple   “can I design mathematical trading system using Fibonacci on its own that will generate profits over a statistically valid period of trades and time”.

I have never managed to that. More importantly I am not aware of any mechanical mathematical trading systems that have managed to do so either. That answers the  Fibonacci question well enough for me because as algorithmic traders we are only interested in trading methods that can be proven to work and generate profits. I will leave all the “nearly” and  “within a whisker of” to others. I want stuff that absolutely stone cold can be proven to have worked.

This is one of the big advantages of the automated trading course it teaches you how to test your ideas in a similarly rigorous scientific way to enable you to  reach your  firm clear unequivocal  conclusions rather than never really knowing if the method or indicator you are using really  works or not.

One of the most common questions that I am asked when people initially enquire about our training courses runs along the lines of “once I have completed your course how much money will I make each week” from trading forex or the emini futures.

The short answer is that you could see returns from the very first trade that you put on – but nothing is guaranteed in trading.  This is  because we are dealing with the future and none of us know how the future will pan out. All we do know is that it probably will not be identical to the past.

However the question is really  based on an entirely understandable but none the less  false premise about trading – which is:

Most people initially believe that learning to trade is like learning your school multiplication tables. The teacher teaches you the tables and once you have learned them  there is nothing more to learn. You can always repeat them endlessly and perfectly  every time. So under this scenario the question makes perfect sense “once you have taught me my tables how much will I get paid each time I repeat them perfectly” – job done !

In fact mastering trading  is more similar to learning to play golf (or indeed any sport).  Certainly you need to be taught how to hold the club, correct stance and swing etc. But the fact that you have mastered these essential elements does not mean that you will go out and play endless perfect rounds or indeed any perfect rounds.

This is because other internal and external factors affect your performance and each golf hole (or trading day) is different.  You can for instance hit  exactly the same shot two days running and one day the ball will land 10 feet from the hole and on the next day it will land in the bunker. This can happen for a multitude of reasons many of which are not completely under your control. External reasons  might be that the second shot could have been caught by a freak gust of wind or the greens could have been running faster than you expected. Internal reasons only partially under your control might be that you may have just fractionally tightened up in the swing etc

So with Golf and trading it is not simply about learning a  technique by rote  and then achieving instant and perpetual perfection. The game is more challenging than that.

In trading this should not really come as a great surprise to people because this is a business where even a modestly competent part-timer can earn much much more than a barrister  or surgeon . The rewards in this business are potentially astronomical which means that  long term success  requires a little more than simply learning  and then repeating the equivalent of your multiplication tables.

It is therefore important to look upon trading as building up a real business for the future.  So it is not so much about what you can earn tomorrow or next week  but much more about what you will earn over the rest of your life. There is a learning curve to trading and your initial goal should be to master and practice the techniques and then the money will come automatically and the compounding techniques that we teach will make those returns grow exponentially.

This is why it is critically important that you get your education from somebody who can prove that they actually trade and make money from trading. Otherwise you will end up simply being taught your multiplication tables (a few meaningless indicators)  and not made aware of all the other nuances that you must be aware of and master before success will knock on your door. Both the beginners/intermediates course and the auto trading course do exactly this.

In Golf we will never play a perfect round or become perfect at the sport – and so it is with trading. Big success in either is more of a journey than an instant destination.

Only daytrade with part of your available capital. Day trading is highly speculative and you should not, and do not need to, allocate all of your available liquid capital to it.

In my own account I allocate less than 5% of my liquid capital  to daytrading activities and yet still achieve the results you regularly see on my real money trading statements often making thousands of dollars in a day..

In day trading  you really can make very substantial sums of money, very quickly indeed even when starting with relatively small amounts of capital. One reason for this is the greater frequency of trade which allows us  to compound up our capital so much faster than with, for instance, swing trading or  LTTF.

Also because individual trade outcomes are more homogenous than with swing or LTTF methods this allows us to apply much more  aggressive position sizing techniques which can  rapidly increase account size  – sometimes by multiples in just a few weeks.

You will likely achieve more success faster with automated daytrading systems than using discretionary day trading techniques. Automated trading systems are formula based methods that can be proved to have worked in the past. Because they are quantitative evidence based systems they can be easily back tested and performance quantified and verified.  Such systems can also be rapidly modified to incorporate any new trading ideas or take account of changes taking place in the market. The impact of any changes to the system rules can then be instantly back tested, evaluated and precisely quantified.

Formula based systems such as these allow the trader to play out an almost infinite number of what/if scenarios in just a few hours and hence customise system performance (total profits, maximum drawdown, average trade etc) to more closely match the trader’s individual requirements and risk profile.

To succeed in daytrading you really do need proper education and training from proven successful traders. Short term trading is by far the most difficult type of trading to master. It looks easier than it is and without correct direction and education the chances of being able to earn a good and consistent living from it are low.

Longer term trading is easier to succeed at but does require more capital. This is because stop losses need to be wider, you have lower trade frequency, win/loss ratios are generally lower and individual trade outcomes are less homogenous. Also full margin needs to be deposited rather than, for instance, 25% daytraders margin.

Daily money goals do not work. The idea that you take 20 pips or $500 per day out of the market and then pack up and go and play Golf is flawed on so many levels. Everyone has winning days and losing days. Sometimes the market is benign and generous whilst on other occasions it is close to impossible to make any money. So on those days where the market is in sync with your systems you should be really capitalising on and pushing home your advantage to make even more money not pack up and go home early.

Ideally you should have duplicated Brokers, internet connections and hardware and software. In my experience broadband glitches are the most common problem then hardware/software problems at our end and finally server problems at the Brokers end. Try and make sure you have covered all your bases when such an emergency occurs.

I trade Forex, commodities and many other futures markets including bonds and indexes. My preference is E-mini trading and nowadays I tend to favour E-mini day trading over even E-mini swing trading.

There are several reasons for why I prefer E-mini day trading to any other form of trading:

Firstly the margin that you have to deposit when day trading the E-mini is 25% of the initial margin that you would otherwise have to deposit if holding positions overnight. With my broker the margin required for the E-mini S&P is around $5,000 to control a contract worth around $100,000. This gives leverage of approximately 20 to 1. If however you day trade the E-mini S&P margin then the margin  drops to around $1,250 giving you effective leverage of closer to 80 to 1. This allows you to either deposit a lot less margin or to trade significantly larger size when  day trading the emini  compared to swing or longer term trading. The smallest E-mini index is  the mini dow where day trade margin is around $1,000.

If you look around some of the brokers are offering  emini daytrade  margins as low as $500 for one lots giving you leverage of closer to 200 to 1.

Now I’m not suggesting for a moment that you would want to use, or indeed should use, 200 to 1 leverage but it is nice to know it is there. It also  allows you to deposit less of your capital with the broker which leaves more available  to  allocate  to  some other venture.

The second reason I like to day trade E-mini contracts is because you close out all positions at the end of the trading day. Typically this is around 9 pm London time. This means that you never go to bed with any open positions to worry about – which I find makes for a better nights sleep !

Not holding positions overnight also limits your exposure to any catastrophic events that may occur as you are only in the market half as long as a longer term trader would be. Holding overnight also tends to be more risky than holding during normal day sessions. This is because whilst the E-mini contracts trade throughout the night volume is thinner and in the event of a catastrophic event movements could be exaggerated. This would also be the case with forex moves.

Daytrading also means that if you feel like going away for  three or four days you can just turn off the computer and jump on an aeroplane. When trading commodities for instance, which typically one holds for much longer periods of time, you need to either continue monitoring your trades progress on a regular basis whilst on your break or delegate that responsibility to a friend or trading partner.

Neither is ideal and nowadays when I want a break I want a proper break.  I will just turn the computer off and forget about trading completely. After all trading is not just about the money but even more so about  the improved quality of life  it brings. No point in giving up being a slave to the company only to become a slave to the trading screens.

The third reason is that missing a trade becomes far less critical as emini daytrade  outcomes  tend to be more homogenous.  One of the keys to longer term commodity trading for instance is that you must never ever miss even a single trade because a large proportion of your entire year’s profit could, and often is,  derived from just that one trade. There is absolutely nothing more soul destroying than treading water in your trading account  for maybe six months only to go away for a week and miss out on the one  trade in the year that goes to the moon !

In emini day trading  no single individual trade outcome is  nearly as critical to your total profits. As we are trading every day, sometimes multiple times a day,  individual trade profits are much more evenly spread. This means if you miss a single trade or indeed several it will not make much difference to your annual profits. Again this makes for a more relaxed lifestyle with a lot less stress.

Of course automated emini daytrading is even better because we do not even need to be at our trading screens we just let the computer do it for us. The Protrader Automated trading course teaches you how to do exactly this.