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Archive for November 2010

Collective2 highlights system trading risks, introduces System Advisor

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Matthew Klein, the owner of Collective2 website, has put out two pieces of work to highlight the risks of system trading (although both read as promotion material for C2 website). The titles of both pieces are framed negatively (as usually) and include an e-book and an e-mail of an e-book length.

The e-book How to Lose All Your Money Trading has 30 pages and the message comes down to one sentence: Don´t trust back-tested systems, or any systems, except the ones verified in real-time on Collective2.

The lengthy e-mail titled Why you should date an ugly girlfriend basically says that all trading systems involve risk, but one should particularly avoid smooth-performance-curve systems. Not-so-smooth (i.e. ugly) systems are supposed to be more reliable.

Then Collective2 introduces C2 Trading System Advisor. This service may be helpful to choose a trading system(s) for trading in a live account, although it is very rudimentary at the moment.

My take on this is that performance of any trading system can tank at any time, irrespectively if it´s verified in real-time (by service like Collective2) or not.  Real-time verification helps to filter off outright scams, but in no way makes the systems more reliable. Empirically, smooth-performance-curve system stats are unsustainable in longer-term and as such should be taken with a grain of salt. However, it doesn´t mean that system stats of a good trading system should necessarily be ¨ugly¨ to be be valid.

And the fact remains that there are very few good trading systems out there out of tens of thousands offered for public subscription. So far there is not nearly a perfect tool to choose the the most appropriate one for the portfolio.