Thursday, March 19, 2015

The Travail of the Signals Provider

“No matter how great a setup looks, there’s always a chance you can still be wrong… Realize that knowing when not to trade is as important as knowing when to trade. I often
joke that we are more wait-ers than trade-ers.”

A signals provider is a trading professional who gives buy and sell recommendations to interested clients. This can be thru newsletters, email alerts, SMS, auto trading, social trading, etc. In most cases, stop loss levels, take profit  levels, exit dates, money management recommendations, and so on are included with the signals. While there are trading signals systems that lose money over time, there are also trading signals that win money over time. Unless doctored, historical performances of good signals systems have average winners that are bigger than average losers.

For a strategy to work, it must be followed as recommended. Unfortunately, many clients would either add irrelevant rules or do something else that is against the strategy, and they’ll still put blame on the signals provider. We tend to forget that signals providers aren’t gods.

One associate professor, who’s also a trading advisor, tells of his experience with clients. When the markets conditions are favorable, the clients will be happy and send him their good will. When the markets conditions aren’t favorable, they become sad and send him words of anxiety and hopelessness, plus questions. When the markets crash further, the clients call, email, and send in words of frustration, plus oaths.

Inexperienced traders that trade based on my recommendations hold me in high esteem whenever the strategy is making money. They may even become overconfident. They may add additional positions that are contrary to my recommendations and risk far too large portions of their portfolios, contrary to my suggestions. However, when the signals strategy is experiencing a losing streak – as it’s normal for all strategies under heaven – many people would think I’m stupid. They’d even wonder if I’m a professional as I claim. They unsubscribe from my services before the signals start making money again.

When new signals aren’t sent because the existing market situation precludes the entry criteria from being met, some clients initiate trades of their own. When they gains from such trades, they feel proud of themselves. When they lose money, they blame the signals provider who failed to send signals when they needed them. Such is the travail of the signals provider.

Good traders who follow positive expectancy religiously are sometimes referred to as wise fools. Good traders aren’t those who make money from the markets only; they’re those who can keep their hard-earned profits and survive terrible losing streaks.

This reminds me of when I was a private tutor (many years ago). Parents hired private tutors to teach their kids at home, with the hope that the teachers are magicians who can perform academic miracles on their kids. You see, there are many factors that contribute to academic failures of children. When a kid fails an exam in spite of the effort of a private tutor, the tutor would be the one to blame for the failure, even if she/he doesn’t deserve that. They don’t usually blame schools, school teachers, the kids, technology, environment, etc.

Something that sounds perfect in theory may fail in practice. A good strategy that sounds great when analyzed will experience occasional drawdowns. Our job is to lose as small as possible during losing streaks and move forwards during winning streaks.

Conclusion: For many years, I’ve been happily engaged in the markets. I’ve learned that the principles that lead to trading success are logical and simple, yet at the same time a priceless treasure. That’s why I appreciate sharing my convictions and wonderful secrets with others. Today I know that success in the market is attainable rather than elusive.

The quote at the beginning of this article is from Dave Landry. The quote below is also from him:

“With my methodology there will be extended periods where there is nothing to do. Trying to make something happen during these conditions because you need the money will create losses. Also, trends take time to develop.”

Learn from the Generals of the Markets: Market Generals

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