Past Performance Is Not Necessarily Indicative Of Future Results

By | January 29, 2016

Since I published Following Forex Trading Signals Is Dangerous To Your Wealth in November, I received a fair amount of criticism/abuse sparked by my comments on  SPM Capital Management. While I don’t expect too many of those people to reconsider their thinking, I do hope some will start looking beyond the surface when discussing performance track-records. I can summarize the message of my critics as follows:

  • SPM has a very good and consistent track-record – 145% over 15 months with only one down month (-5%)
  • you have only 2 months and you’re down -5% so you’re a bad trader
  • his performance is far superior and therefore you have no business criticizing

Now, let’s look again at the title I chose for this article. It’s not some meaningless, small-print disclaimer that money managers are legally required to display. It’s a very profound statement of fact. To wit: just because trader X has had good performance, it doesn’t mean he will have good performance going forward. The reverse is also true: poor performance up to the present time doesn’t necessarily indicate poor performance into the future. By looking ‘under the hood’ of the strategy/trader, or in other words, doing due diligence, a professional allocator will get a pretty good idea of how indicative the past performance is for future results.

I’ve already mentioned the problems I see with both the strategy and the trader behind SPM Capital Management, so I won’t go into that again here. What I want to drive home to you is the fact that by looking only at the return and draw-down numbers of a track-record, you’re getting a distorted and limited segment of the whole picture.

Some would argue that what I’m saying might be true for track-records that have only a few months, but not so for longer (+1 year) ones. Yes, the bigger the number of trades and length of market exposure the track-record covers, the more significant it becomes. However, we can’t use any arbitrary cut-off point (6, 12, 20 months and so on) to confidently say that because up to that point the hidden risk hasn’t materialized, it won’t ever do so in the future. Think about it: if you’ve driven under the influence/over the speed limit 10 times and got away without any accident or having your driving licence suspended, it doesn’t mean this is the safe and right course of action going forward.

Letting your losses run is one of the most common hidden risks (or time bombs, call it what you like) in trading. I’d say it’s as destructive for a trader as drink-driving is for a driver. Either one of them can use plenty of excuses of why they did it and how they are ‘special’ and won’t be affected by any negative consequence. In both situations, they can get away with it for quite some time. For a while, they can even look smart – think of the trader who cuts his losses and has a negative performance vs the one who waits for the market to come back until his positions are in the green again.

To conclude: high past returns might reflect excessive risk taking in a favorable market environment rather than trader’s skill. Understanding the source of returns – the logic behind the strategy – is critical to evaluate how relevant they are.

11 thoughts on “Past Performance Is Not Necessarily Indicative Of Future Results

  1. Georgios

    You’re totally right, letting losses run is a time bomb. It’s not a matter of IF it will explode, but of WHEN.

    I have been following Nick McDonald from He too is looking for consistently rising equity lines with as few as possible negative months. Funny thing, all traders he backed over the past few years displaying these characteristics, have tanked. There is one exception – Jeff aka FX Viper. He’s been going strong since summer 2013. He may be the exception that proves the rule, or what do you think ?

    1. JLTrader Post author

      I got intrigued by FX Viper a couple months ago so I’ve watched the videos Nick uploaded with him. Keeping in mind that those were marketing videos, I still was left with the impression that he knows what he’s talking about. Kind of reminded me of Victor Niederhoffer or Jimmy Balodimas from Hedgefund Market Wizards (‘he breaks all the rules’ as Schwager put it). I would say with a 99% confidence level that the market will eventually catch up with his trading style.

  2. Igor Butsenko

    Hi Vlad,

    Your article is pretty logical (as always) but if people believe in miracles you can hardly change them.

    Nevertheless, nice article.


    1. JLTrader Post author

      No surprise there. As a smart trader (I forget now the name) once said: those who don’t use stops, sooner or later will stop trading.

        1. Anonymous

          Oh, I was wrong. His Max DD is still 25%, not over 33%. He cut loss 12% today.

  3. Anonymous

    Haha, the whole forum are in panic mode because of Viper and SPM

  4. anon

    Viper is just averaging down. He’ll probably get away with it 9 times out of 10, eventually he’ll blow – like all the other signal providers there. They all blow up the same way – as JLT says above.

  5. Jakob

    Big reversal day in eur.usd the Fx Viper fan club must be ecstatic. Let the party begin :))


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