Trading Systems Trap

Not long ago I was scanning a number of performance databases of various and noticed that nearly all the tracking services have some type of a “hot list”. These were typically a list of the best performing futures trading systems over a given period. The common time frames for calculating performance were usually 30 days, 90 days and a 12 months. These listings are of interest to many viewers since they are consistently reported by all the leading tracking services year after year. The question is this…Are those lists of any value?

It has long been my contention that such information is near meaningless. I have always felt that the best performing of the past were not very likely to be the best performing ones going forward. To test my theory, I accumulated data from several of the top performance reporting sites. What I wanted to see was the past year’s best performers to compare them to the best performers of the next year. The thought was to see if last year’s winners were a reliable forecaster of next year’s winners.

The results of comparing many years of previous performance to the future years of performance were as I expected. The data about which systems had performed the best was practically worthless. It, in no way, was predictive with regards to which strategies were going to do the best. What this suggests is that all those “Hot Lists” are possibly misleading. They can lure individuals into the notion that these are the best possible futures trading systems they can be investing in, when nothing can be further from the truth.

Finding Excellent Futures Trading Systems

What this means is that finding good futures trading systems that are going to pay off is going to take work. It is not going to be as easy as discovering something that has done well and just presuming it will continue to do well. What we have observed is that often times the best moment to enter a program is After it has gone through a difficult spell!

Jack Schwager, writer and commodities industry icon, did an intriguing study in his extremely good book Managed Trading Myths and Truths. In it, he found that many successful systems have many losing clients! The reason is evident. Most winning systems produce a “stair stepping” pattern higher, a sequence of peaks and lows on the way up. What Schwager’s research study established was that many people would buy into that system on a high, right after a winning streak. Then, when the inevitable pullback or valley came they would sell out at a loss! So in spite of the systems long term winning track record, many clients lost money investing in it. In Schwager’s opinion, this was “the single biggest investor blunder”.

This was not to imply that individuals should invest in a losing futures trading system. Rather, they should separate choosing what is an excellent system from timing when to get into that system. Once again, the best time to get into a decent system is normally after it has gone through a rough period.

So the question becomes, how can investors find a ideal system if using past performance by itself is not effective enough?

We will explore the subject of finding suitable trading systems in part two of this series.

Dean Hoffman
DH Trading systems

Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future performance. xiwanga zhaodao dingdong

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