Monday, October 1, 2007

Futures System Trading - Reality Check

Let's analyze the results of some actual futures day trading system. In 2005 this system made 159.75 ES pts, 1 point being equal to $50. It accomplished this with exactly 497 trades, which amounts to about 41 trades per month on average. The profits I quoted are hypothetical. Hypothetical profits are for vendors (that's where the word 'hype' derives from). As traders we should be interested in actual profits. Let us estimate them then. The system uses limit orders which can cause 'non-fill' slippage which happens when a trade really does not take place because its order is not filled, but the profit from such a phantom trade is taken into account inflating the system hypothetical profits. Moreover, whenever you cannot exit with a limit order (at the session close), you experience regular slippage that happens to virtually all market orders and to a lesser extent to stop orders depending on the market liquidity and the number of contracts one trades. This kind of slippage in ES usually does not exceed 1 tick per trade for market orders and can be conservatively estimated at 0.5 tick on average for stop orders for the 1-5 lot orders.

In the past, in 2004-2005, you could have this system traded for you by a broker at Lions Futures. It is from this broker that I got the data about the actual system performance. It turns out that during the period of 5 months, from July 2004 till November 2004, the actual profit the system generated was slightly over 43 pts lower than the hypothetical one, or to put it in other words the actual monthly profit was on average about 8.71 pts lower than the profit reported by the vendor. During those 5 months the system would take about 45 trades per month on average.

Considering that in 2005 the system would call a bit fewer trades (41) per month than during the sample period (45) let us assume, probably rather optimistically, the average correction to the hypothetical monthly profits to be 8.5 pts. Multiplying the last number by 12 and subtracting the result (102) from the hypothetical annual profit for 2005 we obtain 57.75 pts or $2887.5 before any commissions. With the commissions included (assuming the round turn of $5 per contract) we get $402.5 (=$2887.5-$2485) per contract.

Suppose that you traded 5 contracts in 2005. That would have made you $2012.5. At the same time you would have paid your broker well over $12,000 and your system provider would have earned $3,000 if you were to pay him on a monthly basis (quarterly payments would have not made a big difference).

And here we come to the punch line which is this: after toiling like a stupid monkey for a whole year you would not have made enough to even cover the system subscription fees, much less your other bills!

Now, you might think that I chose a particularly lousy system to have fun knocking it. Well, actually, the really sad thing here is not my penchant for knocking others (which I might possess too but probably not to a greater extent than any other guy), but the fact that it is not necessarily such a bad system (relatively speaking), meaning that many others are even worse. If I really wanted to have a field day, I would have found a morte suitable system for that. Obviously, that would have been rather malicious of me.

Let me say it again, this time quite seriously: while I do think that this system performance in 2005 was far from stellar, I also think that I can correctly describe it as average and so rather representative of what you can expect from many systems like that. What is not reasonable and justifiable though is the subscription fee which is absolutely not commensurate with the system actual performance.

The moral of this story is quite simple: when it comes to systems, mechanical or otherwise, it's not all gold that glitters. After a careful analysis, such as the one I just performed, many systems with great looking equity curves may actually turn out to be losing money! This comment applies particularly to systems that trade rather frequently. I am not a big believer in mechanical systems that trade more often than 20 times a month, especially when they use limit orders to initiate or close their positions.

Waldemar Puszkarz, Ph.D., is a web veteran with 15 years of web surfing under his belt. By training, he is a theoretical physicist, but his interests are much broader than science and include trading financial markets, sports betting, poker, and researching online business opportunities. He is also an avid book reader and sports afficionado. Currently he is making his living mostly as a day trader. He has been in the trading trenches for almost a decade during which he has traded a variety of financial instruments. He is the owner and webmaster of ( which provides free common sense trading education and simple trading systems for e-mini and stock markets as well as reviews of honest online business opportunities in Meet HOBO ( section of his site.