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Web Trading Systems
Beware of Websites Selling Commodity Trading Systems
that Guarantee High Profits with Minimal Risks
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
