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The United States Commodity Futures Trading Commission (CFTC), the federal
agency that regulates commodity futures and options markets in the United States,
has witnessed an increase in the number of Internet websites fraudulently promoting
commodity trading systems and advisory services. Among other things, these
websites falsely claim that advertised performance results are based on real
trading when, in fact, the results are based on hypothetical trading. The CFTC
urges you to be skeptical when promoters of trading systems and advisory services
claim that their products and services will earn high profits with minimal
risks. You also should be forewarned that systems which trigger frequent trading
signals as part of a daytrading strategy can result in substantial commissions
and fees.
NO TRADING SYSTEM CAN GUARANTEE PROFITS
Commodity trading systems typically are computerized programs that signal
members of the public when to buy and sell commodity futures and options contracts.
Systems produce buy and sell signals based on mathematical formulas and are
typically based on technical analysis of trading data (trading volume and prices),
as opposed to fundamental analysis (analysis of economic factors such as supply
and demand). Trading systems that are based on technical analysis attempt to
predict future price movements based on historical prices, price relationships
and price trends.
In deciding whether to purchase a particular trading system to trade commodity
futures or options, members of the public should remember that no commodity
trading system can guarantee profits. And, whether or not a trading system
is used, commodity futures and options are typically high-risk endeavors.
HYPOTHETICAL TRADING RESULTS CAN BE UNRELIABLE
Many trading system promoters advertise their systems by reporting hypothetical trading results. Hypothetical trading results typically are based on trading
simulations using historical price data or simulated "real time" computer
trading. To obtain these results, trading system promoters typically pretend that they traded futures contracts at market prices that occurred some time
in the past. They then calculate the trading results that these purported trades
would have achieved had they been placed, based on actual historical prices.
These results often show impressive trading results and large net profits with
only a few, small margin calls.
Whether based on historical data or simulated "real time" trading,
hypothetical results do not reflect the results of any actual trading. In other
words, there is no actual futures account, no actual investment, no actual
trading, and no actual profits. The results are purely the product of simulation.
Hypothetical trading results have several inherent limitations:
-
20/20 Hindsight with Historical Results -- Since the trading systems that
produced the results were not actually traded under real market conditions,
the purported results fail to take into account market circumstances that affect
traders and their decision-making process, such as anticipated news events
that could have an impact on the supply, demand or price of the commodity.
-
"Real-time" is not Real -- When marketing trading systems, some
promoters claim that their systems have performed successfully in "Real-time
Trading." "Real-time Trading" only means that the system has
been tested using a live data-feed, rather than being tested using historical
market data. In "Real-time Trading," however, no trades have actually
been placed in the market. Performance results based on "Real-time Trading" are
merely a form of hypothetical results, with the same limitations.
-
Financial Limitations -- Hypothetical results may not adequately take into
account the ability of a trader to absorb trading losses or to meet margin
calls. Trading systems assume that the trader can withstand all losses
generated by the system and can meet resulting margin calls. It is much easier
to absorb
a trading loss on paper (hypothetically) than to do so in reality. Many
traders find it unacceptable to sustain several consecutive trading losses
and/or margin
calls. Moreover, in an actual trading environment, a trader's financial
condition may change over time and affect his or her ability to continue
following a
trading system.
-
Not Tested Under Real Market Conditions -- Hypothetical trading results
assume that futures contracts have been bought and sold at specific prices.
Since
these assumptions have not been subjected to actual market conditions,
they may overestimate or underestimate the performance of a system. In addition,
some market conditions may make it impossible to execute a trade. For instance,
many systems assume that stop-loss orders will be executed at their stop
price.
Under actual market conditions a stop-loss order might be executed at a
better or worse price, or not be executed at all. Further, actual market
conditions
include bid/ask spreads which might not be reflected in the prices used
in hypothetical trading. Moreover, the actual execution of a trade could
impact
the price paid, especially in less liquid or illiquid markets.
-
Possible "Rigging" of Results -- A member of the public should
be alert to the possibility that the system promoter manufactured results
by selecting
historical trades that would have yielded the greatest returns.
-
Trading and System Costs -- The profit claims of promoters may fail to
take into consideration the cost of purchasing or leasing a trading system.
While
the prices of systems vary, many are sold for thousands of dollars. In
addition, most of these systems require that the user obtain a data feed
from a vendor.
System promoters may also fail to take into consideration the impact on
profits of commissions and fees charged by brokers in connection with futures
and options
trading. Such commissions can have a substantial effect on profitability,
particularly when the system generates frequent trading signals. A user should
take all
of these costs into account because they raise the break-even point in
trading.
Because of these limitations, CFTC Regulations require that the presentation
of hypothetical trading results be accompanied by a specific cautionary statement
warning of the inherent limitations of these results.
FUTURES CONTRACTS ARE VOLATILE AND RISKY
Persons considering trading commodity futures or options should educate themselves
about futures and options and realize that they may lose large sums of money.
Remember: "If it sounds too good to be true, it probably is too good to
be true." The following checklist should help consumers in deciding whether
to use a trading system.
IS A FUTURES/OPTIONS TRADING SYSTEM RIGHT FOR YOU?
-
Do you have the financial ability to sustain trading losses and meet margin
calls? When trading futures contracts on margin, you risk losing much more
money than the initial margin amount. If the market moves against you,
you may be required to pay additional funds. The use of margin creates potentially
large exposures to loss.
-
Can you lose your entire investment and more without a change in your lifestyle?
-
Do the trading results sound too good to be true?
-
Are the advertised trading results based on actual trading or "hypothetical" trading?
-
Has any trader used the system in actual trading? If so, how has the trader
fared?
-
Will the system promoter provide you with independent verification of the
claimed trading results?
-
What is the total cost of the system?
-
Have you factored into your purchasing decision the impact of commissions
and fees that can result from frequent trading?
-
What are the additional costs (data feed, etc)?
-
Not all system promoters are required to be National Futures Association
(NFA) members or registered with the CFTC. A call to the NFA (800-621-3570
or 800-676-4NFA)
or the CFTC, or a visit to the NFA's website at http://www.nfa.futures.org/basic,
can confirm the status of a particular promoter.
-
Have you checked with the NFA whether the system promoter has been disciplined
by commodity regulators?
From: http://www.cftc.gov/enf/00orders/enfposting4-tradingsystem.htm
