Friday, September 7, 2007

How to Analyze the Veracity of Investment Newsletters

When trying to analyze whether a promotional ad for an investment newsletter or a market timing investment trading system is worthy of investigation, the following questions should be asked:

Does the strategy have a track record? Without this you are really allowing your emotions to be in play. All of us want to believe that if someone says something it must be true. Yet the sad fact is the truth is probably just the opposite. Most ads and promotions are put in print for self interests first, and all else second. One has to view anything on the web with a skeptical eye. The minimum that an investment strategy should give you is a previous track record. The longer the track record is the better. Something that has worked for a matter of months is usually not long enough in the trading world to be considered successful. Some promoters do not release their track records because they say that past performance is not an indication of future results. This is true but certainly no performance is not an indication of future results either. Some promoters do not release their track records because they say we used to do a track record but subscribers got upset if the strategy lost money when they subscribed even though it made money over a yearly period. That may also be true but it is also part of the game. Subscribers can not expect to make money from day one when trading a long term strategy. However, that should be self evident in the track record. And some promoters do not release their track records simply because they dont have one or they have a bad one. Its as simple as that no matter what they say.

Is the track record that they are promoting in real time or was it simulated in a computer based on past data? What does this really mean? Real time means that the trading signals that were used to produce the track record results were actually generated at that specific moment in time. In reality. Most track records on the investment web sites are not real time even when they say they are. Even if they did not use a computer and it was done by hand, if the data taken from the last five years but the web site is only a year old then it cant be so. Why is this so important? Because trading is not trading if human emotions are removed. No greed, no complacency, no panic, no hysteria. Almost all computer-generated trading programs fail miserably when actually implemented because either the data was too short a time period or the human factor was ignored. That is assuming the human that input the data did it without human emotion. I once had an acquaintance who told me he had a system that returned 80% per month for the last 6 months. He said he implemented it 6 months in real time. I asked how much he had invested in this strategy. He said nothing because he was paper trading. I said that there is no such thing. He proceeded to tell me what paper trading was. I replied that I knew what he thought paper trading was but it is not trading because when you paper trade your emotions are not in play. Human greed and ego has a way of making you believe something to be real without looking objectively at the data. But once actual real money is at risk the complexion of the situation dramatically changes.

How can you tell if the track is in real time if they lie about it being in real time? This is not always easy but there are some basic tell tale signs. If it is a short term system that risks very little and trades often, say 10-50 times per month. Yet it has an 80-90% trade success ratio, which is almost impossible statistically. Most day traders and position traders are doing well if they are winning 40-50% of the time. If they risk more and do not use tight stops, then the win loss ratio goes up but the size of the drawdowns or the size of the largest loss has to go up. Longer term trader may have a slightly better win loss ratio but only if their risk is also larger. To make a general statement, the larger the win loss ratio is the more I would be skeptical.

What if the track record is a combination of partly historically back tested signals and partly real time signals. How should I analyze that? The first thing to look at is if the win loss ratio has changed dramatically over the track record time period. For example, if it is a 5 year time period, and the promoter claims that the trade signals went live 2 years ago yet the win loss ratio changed dramatically only 6 months ago, beware. The hardest thing to detect on the web is when youre being conned about a hypothetical track record because there is no real way to tell when a web sites track record was edited deleted or revised. Some web sites use an independent tracking site but there are no real ways for a consumer to know other than that.

I hope that the previous ideas will help to determine fact from fiction in the world of investment newsletter promotions.

John McKeon

The Trend Is Your Friend?

Everyone has heard The Trend is Your Friend. If you follow the trend you can make money. It doesnt matter if the trend is up or down, if you follow it, you will make money.

This is easier said than followed. If youre like me, you spend a great deal of time poring over charts and graphs trying to find a stock that is in a trend. Ive used candle sticks, moving averages, and just about every other charting trick to try and identify where the trend is going. The secret is to try and find the trend when it is starting and follow it until it changes.

It looks so easy when you read about it in the book, but boy is it ever so hard to actually implement. Ive even tried to design my own trading strategy using technical analysis. It is so easy with the charting software; you can do some back testing to try out your great theory that is going to set the world on its edge. I confess, one of the tricks Ive tried was using the 10 day moving average crossing the 30 day moving average as a turning point. Sometimes it works, sometimes it dont.

One thing that Ive discovered is that what works for one person does not necessarily work for another. It comes down to temperament and discipline more than anything else. If you can follow a system, remained disciplined when everything is moving so fast, and have the temperament to face the losses that come your way, you can be successful trading in the stock market.

There are dozens of systems out there, some are better than others. You have to take the responsibility to research how the system works, learn the ins and outs of it. And then, you have to face the question, do I have what it takes to trade this way. You have to be honest with yourself, because if you arent, you will lose your shirt.

Even the best laid plans of mice and men sometimes go awry. You have the perfect stock. The sector is blasting out of orbit. You find the options priced perfectly. You buy a group of call options and wham, the market tanks. Your options expire worthlessly.

Its happen to me more times than I care to remember. If it hasnt happened to you yet, it will, its only a matter of time. It is the nature of the beast that we are trying to tame.

There is just something about day trading that is so exciting. It just gets into your blood. Some days you cant wait for the market to open, so you can go forth and do battle with market. Other days, you just need to quit while youre ahead.

But if you have a couple of bad trades, it can really sour you on the whole trading game. This is when you just have to step back and take a look at it. Maybe, you just need to get away for a day or two. Relax, do something different. Your unconscious mind will work on the problem and when you come back, you will have a better outlook and can spot the trading opportunities faster than they can come at you.

Ive learned the hard way, if I try and stay in the market when things are going bad, it just gets worse. You need to step back and relax, because tomorrow is another day. If you still have your trading capital you can keep in the game. If you lose all of your trading capital because you are being stubborn and not recognizing that things arent working out, then it is your fault.

John Marston is a self taught trader who has traded online for over 15 years from his home in California. Here is the exclusive Forex Market Trading System that John uses; you can also go to his websites at and which have a wealth of information about various trading strategies.

Forex Money Management How To Place Stops and Maximize Profits

Many traders are right about market direction enter a trade and then get stopped out then see it go onto make thousands or tens of thousands of dollars and there not in.

Welcome to the world of forex trading.

The fact is placing stops is in my view the hardest part of trading. Lets look at it in more detail.

Lets dispense with a couple of myths first.

1. FOREX brokers hunt stops.

As trillions of dollars are traded each day no broker is big enough (and no they dont all group together) to move the market to pick off your stops.

You are simply subject to market movement and the volatility that is inherent in trading forex markets.

2. A tight stop is better as there is less risk

Not necessarily so, this is the myth of day trading.

Trade with a tight stop in a short time frame and you have less risk.

Not true. Volatility again is totally unpredictable in short time frames and most day traders near enough guarantee a loss albeit a small one.

However there is no point using a tight stop if you almost guarantee a loss every time.

Ever seen day traders make money?

Well the above is one of the major reasons why.

So how do you place stops?

There are many different ways, but here are some observations as they relate to long term trend following.

1. Support and resistance

Yes, good old fashioned support and resistance is a good way to place a stop.

If for example you are trading a breakout and you think its valid the stop is behind the breakout point.

2. Never move a stop to soon

Many traders trail stops to lock in profits and this is a critical error even experienced traders do.

This in most cases simply sees them stopped out by volatility and reactions to the major trend.

They then end up with marginal profit and miss the big trend.

If you are long term trend following and have confidence keep the stop back and take dips in open equity, this is the only way to hang onto to the really big trends so get used to the feeling, its not nice and you need lots of discipline.

Keep your eye on the big picture and it will be worth it in terms of profit.

3. Dont use indicators for stops

While you can use momentum and other indicators to enter trades and determine price strength and value areas never use them for stop placement.

We love the stochastic but as price indicator but would always use chart support and resistance first.

Bollinger bands are really for defining volatility and value areas it should not be used for stop placement on there own. Keep in mind Bollinger bands used in isolation would re set stops everyday and could create a huge loss.

My own view is support and resistance is the simplest and easiest way to place stops.

Another way is to use a straight monetary loss

I know someone who simply placed a $500 dollar stop from entry. I never knew how his system worked but it certainly worked for him.

The fact remains stop placement is one of the hardest parts of trading forex and there are many ways to do it and we have only touched on the subject here.

Our view

We normally trade breakouts that have been tested numerous times i.e. when a break comes there are high odds of an acceleration of price in the direction of the break.

This means the stop can be simply tucked in below the breakout point meaning risk to reward is good.

This allows a tight stop with great profit potential and we never move it to quickly if we think a good long term trend is developing.


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