Author Archives: JLTrader

Listen To The Market, Not The Talking Heads

In late January 2016, Dennis Gartman, publisher of the apparently widely read “Gartman Letter,” a daily markets newsletter, and an omnipresent talking head on CNBC affirmed: we won’t see crude oil above $44 again in my lifetime. Well, 5 months later, and with oil touching $50, Mr. Gartman is still very much alive and probably laughing all the way to the bank, thinking that people pay him big bucks to espouse such drivel.

From what I can gather searching the internet, the subscription cost for the Gartman letter is $400/monthly. Btw, I really hate these BS marketing tactics where you don’t name upfront the price of the product or service you sell. I mean, I have to scour the internet for the price because I can’t find it on your site. WTF is that all about ?

Here is a sample of the Gartman letter, published each business day.

our subscribers include leading banks, brokerage firms, hedge funds, mutual funds, and energy and grain trading firms from around the world

By way of comparison, a subscription to Wall Street Journal costs 29 euros/monthly while one to Financial Times will set you back 50 euros/monthly. In this context, it’s beyond me how the Gartman letter can justify its price. But wait a minute, maybe the value lies in his investment recommendations, right ? Wrong! You can read the whole story in this article, Celebrity advisers can cost investors a lot of money. To summarize it, Gartman had no track record as a money manager prior to launching a fund in March 2009. This went public at $10 a share but closed 4 years later at $7.90/share, never having surpassed its IPO price.

Market letters tend to lag behind the market since they generally respond to demand for news about recent activity. Although there are certainly important exceptions, letter writing is often a beginning job in the industry, and as such may be handled by inexperienced traders or non-traders. Good traders trade. Good letter writers write letters. – Ed Seykota

It should be clear by now that this sort of people are not on TV to impart trading and investing knowledge. The reality is that networks have to occupy air time so they bring telegenic persons who in turn use this chance to raise their profile and get free publicity for their services.

If you want to stand a chance to become a successful trader or investor, you can’t rely on entertainers to be your guiding light. You have to get your hands dirty so to speak, study the markets, the real traders, and develop a methodology that fits who you are.

The Mirage of Set and Forget Trading Systems

What would you think if someone came up to you and said: buy my $300 course (only today you can get it for $275 :) ) and spend just 10 minutes a day and you’ll become a top lawyer or doctor. All sane people will just tell this guy to get lost. But replace  lawyer with trader and many otherwise intelligent persons will answer something like: that sounds great! and it’s discounted too! where do I sign-up ? :)

If you want to grow your savings, nowadays the access to professional traders and asset managers is greater and cheaper than ever. Starting with mere hundreds or at the most with a few thousands, you can invest in all sorts of mutual funds, index funds or liquid alternatives. Which ones are the best and how an allocation should be set up depends very much on who you are and what investment goals and horizons you have. Anyway, these aspects are beside the scope of this article. The point I’m trying to get across is as follows: if you have no interest in the markets, no passion for trading and you’re not willing to dedicate time to learn, why not let professionals do the job ?

I feel my success comes from my love of the markets. I am not a casual trader. It is my life. I have a passion for trading. It is not merely a hobby or even a career choice for me. There is no question that this is what I am supposed to do with my life. – Ed Seykota

The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge. – Paul Tudor Jones

Do you really think you’ll get better results than professionals with a so-called set and forget system you only spend 10 minutes a day on? Achieving a good long term risk-adjusted performance requires a set of skills that takes time to develop. This is true for all professions, and trading is no different.

A very similar situation can be found in the fitness equipment and health supplements business. Ads along these lines abound: use vibrating belt XYZ 30 minutes a day (while watching your favorite TV series and eating ice cream :) ) and take these pills and you’ll too look just like the lean, muscular, tanned and sexy models that advertise them. Only the most delusional people will buy into these ads: those fit men and women not only spend hours in the gym and tanning salons and watch everything they eat – they have the discipline to do it day after day and week after week.

Nial Fuller – The Unexpected Winner Of AxiTrader Million Dollar Competition

I must admit, I’ve never seen this one coming ! :) Nial Fuller as the winner of AxiTrader Million Dollar competition ! Click to see the official announcement.

Quick recap: I’ve written my impression about AxiTrader’s marketing exercise disguised as a search for trading talent back in December. You can read the article here.

Nial Fuller is a self styled ‘trading authority’ and ‘professional trader’. He’s been selling $300 Forex price action courses since 2009. Seven years and numerous challenges to back up his claims later, there’s still no verified track-record of his trading. He was exposed as the dishonest internet marketer he actually is in this review by

In the past, Nial Fuller has had at least one type of business relationship with AxiTrader, whereby clients who opened an account with a minimum of $1.000 (if I remember correctly) received his course for free.

Now, I see two possible explanations for his winning the competition:

  1. He did get lucky. The way the competition was structured, selecting the winner strictly based on the biggest percentage return over a 3 months period, luck played a major role. Being one among maybe a few hundreds participants, Nial Fuller’s probability to win was small, but it existed.
  2. He was ‘helped’ to get lucky. The skeptic in me can’t sweep under the carpet the fact that the result is very convenient for both parties involved. Nial Fuller can use the fame of winning the competition  to attract more clients who then can be directed to open a trading account with AxiTrader.

Later edit: as Janos pointed out in the comments section, there were 123 participants. The user Maverick gambled the minimum amount required of $5.000 and came on top with a 369% return (-71% max draw-down). The identity of Maverick was revealed only yesterday as being Nial Fuller. Assuming everything was done legit, it still casts a bad light on Fuller – why didn’t he say from the start, ‘hey guys, I’m going to try my luck with AxiTrader’s competition, wish me the best’ ? Because he wanted no one to know, had he blown up the account. But now that he won, he can BS gullible people with a text like this:

After taking out the competition, Mr Fuller said, “Winning the competition was a balance of finding quality trading opportunities, applying sophisticated money management and having the discipline not to trade and risk giving up the lead.

Losses – The Cost Of Doing Business

How one approaches trading will ultimately determine if he’s going to be successful at it or not. Some people think trading is a sort of salaried position – they run back-tests or use performance simulation calculators, torturing the data until they get the monthly/yearly figures desired. So they ‘sign the contract’ and start trading, full of confidence. But reality soon catches up with them and exposes the rosy calculations and projections as the worthless numbers games they always were.

The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages – Jesse Livermore, Reminiscences of a Stock Operator

Others begin trading with the correct mindset – viewing it as the business it actually is. While they get some things right (for instance the irregularity of income) many still fall prey to a big mistake, namely their approach to losses.

Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong, not taking the loss, that is what does the damage to the pocketbook and to the soul. – Jesse Livermore, Reminiscences of a Stock Operator

To put it very simply, the principal goal of a businessman is to obtain profit. He can do so by adjusting the two sides of the ledger – revenues and costs – normally trying to maximize the first and minimize the second. The trading equivalent of revenues are winning trades and the equivalent of costs are the losing trades.

I want you now to think of how a business owner treats the business expenses, such as advertising, hardware acquisition, employee wages, and so on. Does he feel anger, being stupid, shame or other negative emotions ? Of course not. He views them as just the planned, recurring cost of doing business. If he would try to cut all or most of these expenses, his company would just cease to exist.

This is the point where many traders make the mistake of emotionally attaching themselves to losses. Thus, they don’t see them as a normal part of running a business and therefore they try either to virtually eliminate them by searching for ‘90% win rate wonder systems’ or to ignore them by not using stop losses.

It’s impossible to trade without losing (as a matter of fact, many successful traders win on less than 50% of trades) just as it’s impossible to run a business without incurring costs. Keeping this simple fact of life in mind will most probably make you if not a better trader, certainly a less stressed one.

When Trade Intervention Costs You – An Example

Do you always wait for your trades to hit the stop loss or close them early if they don’t act right ? That’s one dilemma traders face and unfortunately there’s no one size fits all formula available. Some snake-oil salesmen and pretend traders would want you to believe that if a trade doesn’t work out the way it was supposed to, it’s always beneficial to close it before it reaches the stop loss. It’s not difficult to bring up cherry-picked examples to support this thesis. The end goal being, they want to appear smart and prescient even when they’re losing.

In actual trading though, shit happens. You might close a trade just before it takes off and had you not intervened, you would’ve stayed along for the ride. Below is an example of such a trade:

USD/JPY trade

The reason for entering this trade was the double-bottom and the subsequent break of the 108.46 resistance level. For a while, it seemed everything was fine, but by the NY session close, the lack of follow through was evident and the potential for reversal appeared high. So what did I do ? I manually closed the trade at 108.44, believing I will ‘save’ 14 pips out of the total 30 pips stop loss that looked almost certain to be triggered. What was the low of this down move ? 108.439 !! Closing a long position within a 1/10 of a pip from the low. How about that ?

Right after I closed the trade, the price started moving in my original direction. At first sight, the timing might seem uncanny. But if you put things in perspective, this being one trade out of thousands, it won’t look so improbable anymore.

A case like this, when the price suddenly moves back in your favor, presents yet another dilemma: do you re-enter or not ? Again, there’s no hard and fast rule. In this particular situation, considering the time of the day (end of NY session), I decided not to. I thought that the price will continue its downtrend or, at best, remain in a range. I was proved wrong.

How A Trader Self-destructs In 4 Minutes

This is one of the traders at Darwinex I had my eyes on ever since he listed his DARWIN and I thus became aware of him. In a sea of <$500 accounts with EAs toiling on them, here was this guy with an account that I estimated to be around £10k, trading most probably manually and having a great risk-adjusted performance.

My initial reaction

The statistics looked good, but I soon realized two things:

1. I knew nothing about this guy and his trading strategy

2. From the available track-record, I couldn’t tell anything about his ability to handle a losing streak, which is kind of like declaring a driver is skillful because he didn’t have an accident driving in sunny weather on an empty highway. How about driving at night, when there’s lots of traffic, in rainy or snowy conditions and so on ?

So I was in for a bad surprise when the other day I saw this:


Value at Risk (VaR)

So what happened ?! Looks like the trader simply lost his patience and decided to start gambling. A monthly VaR which for the greater part of 2015 stood around 5%, in 2016 it gradually increased to 9% (no reason for alarm yet) and then suddenly in March it jumped to 27% and then 70%. For more details, we can go to the trading journal tab:

Trading journal

Here we can see that it only took 4 minutes on the 16th March (during the FOMC press conference) and an insanely leveraged position in EUR/USD for this guy to lose ~25% of his account. My first thought was that he must’ve been affected by some really bad slippage. Let’s give him the benefit of the doubt. But checking the charts and the time the trade was entered, I could easily see the FOMC generated commotion was all gone by the time he opened this disastrous trade. Furthermore, a few other trades were opened shortly thereafter, with even higher leverage – but fortunately for him these didn’t cause any more financial damage.

We could imagine all kinds of scenarios for what made this guy act so recklessly on the 16th. But the data shows that this wasn’t just an one-off. The first sign that this was all part of a deliberate action, and not some accident, was the leverage used a week earlier, on the 9th of March, which was way higher than what had been customary in the past. And also the trading afterwards, on the 18th.

So here are my takeaways from this sad story:

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently. – Warren Buffett
  • excessive use of leverage kills or severely cripples your account (no news here, but this is worth repeating)
  • to be able to appraise a trader, statistics are not enough – they are even less useful if they only cover a period with positive performance
  • as an investor, having an independent risk manager is essential to protect yourself from the vagaries of the trader’s behavior

What Can Traders Learn From 50 Cent

In the declaration, 50 Cent — real name: Curtis Jackson III — claims that the posts depict ’prop money’ used for G-Unit Records and videos and photo shoots.” – click for full article

50-cent-broke-cash So what’s all this got to do with trading, right ? A lot, actually. It clearly shows how BS can go unabashed on social media. And it’s not only the money. That’s just a part of the whole fantasy image of trading success. Depending on the guru, you’ll see well crafted photos and videos of exotic locations, expensive cars, beautiful, bikini clad women – all the stuff needed to convey a sense of wealth, freedom and fun. You can enter this world too, if you buy whatever the guru is selling.

Think of all the self-appointed trading experts that use social media to trick people. From Tim Sykes to AstroFX, from Anton Kreil to Kunal Desai and his Bulls on Wall Street racket. If you call yourself a professional trader, then your verified track-record should be your business card. But just try and ask them for one. You’ll get a thousand different (BS) excuses, ignored or blocked.

The saddest thing though is that some parts of the fairy tale being sold are not faked. For instance, that Lamborghini might really be paid for and not just hired for the day. And that stay at a 5 star resort on a Caribbean island could very well be for real. But they weren’t bought with trading profits, as you’re induced to believe. How could they be, when these guys most probably don’t even have a live brokerage account. No, it’s all been purchased with your money. You paid for it, by buying that course, the DVDs, chat room memberships and so on.

So next time when you pull out your credit card, ready to buy your way into trading success from an ‘expert’ who is ‘living the life’, just stop and think for a minute. What you are actually doing is paying for the guru’s ‘good life’ and only getting BS, deception and misinformation in return.

Do You Know What You’re Investing In ?

But when you don’t know what you’re doing, it’s fatal, Mr. Moore. Not knowing what you’re doing – Bretton James, Wall Street: Money Never Sleeps

Precisely targeting and controlling the volatility level (20% monthly VaR) for DARWINs is one of the great strengths of Darwinex. To put this in perspective, compare it to the roller-coaster volatility of S&P 500 – from 10% to over 50% in the past 10 years. This makes DARWINs much more similar to systematic firms which  offer funds and managed accounts with constant volatility than to stocks or equity indices.

But, volatility and risk (prospect of permanent capital loss) are not the same thing. The stock of a company with a business model that is opaque and overly complex is much riskier than the stock of a relatively simple, transparent company. Think for instance Bear Sterns or Lehman Brothers vs McDonald’s or Coca-Cola.

Coming back to Darwinex: there is a big difference between buying something you can assess and understand and buying a black box. Or worse yet, a black box within a black box. After going through the screening process mentioned in a previous article, there are two more things a prospective investor should check:

  1. Just like funds and CTAs offer a prospectus or a disclosure document, does the DARWIN provider have something similar ? ie, Is there any description of the strategy used ? Are you buying a short/medium/long term system ? Discretionary or systematically traded ? Does it use fundamental analysis, technical or a mix of both ? What is the risk management process ? Granted, some of this information can be gleaned from the statistics that Darwinex offer, but it would be good to know that the trader has an articulate plan put forward and which is adhered to.
  2. The DARWIN’s equity line should be similar to that of the strategy. Furthermore, you can check the month by month VaR variance of the strategy. If this month it trades with 5%, next with 30%, then 10% then 50% and so on, the performance of the DARWIN will be very different to that of the strategy. Why does it matter ? Because only if they resemble one another are you actually investing in the strategy that convinced you at the previous point – scaled up or down to meet the 20% VaR target. Otherwise you’re buying a black-box. Consider this DARWIN for instance: during 2015, all months were positive for the strategy, whereas the DARWIN had 6 negative months. Two totally different things.

Finally, remember that nobody has a crystal ball to predict the future with. But a good understanding of what you’re investing in and trust in the team behind it will go a long way in both increasing the probability of success and making it easier to withstand difficult periods.

Screening the DARWIN Providers

Following the discussion in the comments section of this blog post, I decided to  put my investor cap on and write an article on screening DARWINs. For those who don’t know already, Darwinex is an FCA (UK) regulated broker and asset manager where traders can have their strategies packaged into an investable product called DARWIN ( Dynamic Asset and Risk Weighted Investment). Darwinex takes care of all the regulatory and logistical issues; you’re left with doing the trading, and just like if you were running a CTA or hedge-fund, you’re compensated via a percentage (20%) of the quarterly profits you make for your investors.

At the time of this writing, there are already 521 DARWINs listed, that investors from all over the world (excluding US and Japan) can invest in, starting from $200.

There are three major red flags that I have identified when browsing through the DARWIN providers list and I think potential investors should be aware of them.

Firstly, the number of strategies a provider has: there is no limit here; it can be anywhere from one to a ridiculous 24 strategies. I’ve already mentioned how professional traders have built a career and are known for one style of trading or investing. The same thing is true for other fields such as law, medicine or sports. In order to excel at something, one has to specialize. How then can a person who most probably is trading part-time be on top of not 2 or 3 strategies, but 24 ? I’ve heard the following argument: they are run on EAs (robots) and therefore the requirement for human involvement is greatly reduced. My answer to this: someone must monitor and constantly reevaluate them. How can you keep an eye on 24 EAs when hedge-funds have one or more persons working full time on strategies executed pretty much automatically too ? Furthermore, why don’t you select the very best 2-3 of those 10-20 or whatever and only list them ? Or is it that you don’t really know/trust what you’re doing and just throw out there as many DARWINs as possible, hoping to get lucky on at least one of them ?

Secondly, the amount of capital that the trader backs his strategies with. There is an important proviso though: low capital doesn’t necessarily mean bad and high capital doesn’t necessarily mean good.

If all I have is ten dollars and I risk it, I am much braver than when I risk a million, if I have another million salted away. – Jesse Livermore

Having said that, what rational person would invest any money in a provider that has for instance $50 a piece on 10 DARWINs ? The minimum amount you can open an account with at Darwinex is $500. But there’s no threshold for opening a sub-account with a fraction of that amount and listing a DARWIN. Consequently you can find many DARWINS that are backed with less than $100 of the provider’s capital (those cases where the ‘trader’s risk’ is <$100 and VaR is close to 100).

Thirdly, many strategies are run on absurdly high VaRs – 50%, 70% even 100%. In other words, those strategies can lose a significant percentage of capital or blow-up in any given month. This type of trading is more often than not a sign of an amateur.  Now, because DARWINs are standardized for 20% VaR, investors are protected from a sudden blow-up. Some DARWINs will even be profitable, despite the fact that the underlying strategy is losing money. Notwithstanding these facts, why would an investor back with capital such reckless trading ?

I believe that only after eliminating those DARWINs that display the above red flags (usually if a DARWIN has one red flag, it will have all three of them), can we continue the due diligence process by looking at the strategy, performance metrics and so on. All this in future articles.

Past Performance Is Not Necessarily Indicative Of Future Results

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.