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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.


Why the most popular Collective2 system is NOT in our portfolio

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Collective2 sent an email describing EFT Timer as the most popular system . They list 3 reasons why they think the system is the most popular: simplicity, can be traded in smaller accounts and fair monthly price.

The performance is outstanding. Smooth equity growth, 30 months track record, 70+% annual return with less than 30% max drawdown.

Yet we don´t have it in our portfolio for a very simple reason: the total number of trades is just 21 at the time of writing. The sample (number of trades) is too small to draw a statistically sound conclusion. To avoid the fallacy of small numbers, we look for systems with 30 or more trades. 30 is not a magical number, but anything below it we consider as something influenced by the law of small numbers rather than a proof of a working trading algorithm and good performance.

Written by A.S.

July 6, 2010 at 1:08 pm

Sources of Trading Systems

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The ecosystem of automated trading develops fast. Capital allocated to system trading through industry leaders, such as Covestor or Collective2, reportedly grows by 50% annually.

There is still a plenty of room for growth as the investors ¨chop off the old block¨, i.e. disallocate the funds from chronically non-performing and increasingly risky traditional investments in stocks and bonds.

I here list 8 sources for you to choose as a provider of trade signals for your system trading account. Those sources are the ones likely to be used by both emerging system developers as well as investors.

Collective2 or C2 is an internet-based company. C2 collects performance data of various trading systems, independently verifies such performance data and makes the systems available to subscribers to trade in real-life trading accounts. At the time of writing there are about 7’000 trading systems registered on C2.
The way it works is — you go to C2 web site, register as a user, find a trading system which, as an example, shows 88% annual return, make a few clicks to set the system up to send the trades to your brokerage account and, if the systems lives up to the expectations, you have just arranged for an investment with 88% annual return.
C2 promotes itself as think of Collective2 as „do-it-yourself” hedge fund.
C2 works only with hypothetical data, although it checks all the signals in real-time and provides both estimates (slippage, realism factor) and tools for investors to evaluate what performance in live accounts would look like.

Covestor (and
Covestor is one of the best-managed and innovative trading system aggregators.
Covestor displays performance data from live trading accounts and is limited to stocks only.

Zulutrade deals with hypothetical forex signals only.
Zulutrade is probably the fastest growing of all system aggregators. It takes only a couple of minutes to sign up as a system vendor. Zulutrade is equally easy for investors as account opening procedure is straigthforward and easy with any of the selected brokers.
There are no fixed fees for neither system vendors, no investors. Systems can be added and removed from trading in live accounts with just a few clicks and at no cost. Fee for the services is pay-as-you go in form or bid-ask spread markup. Such spread mark-up (about 2 pips round-turn for the most liquid currency pairs) is then shared between Zulutrade and the system vendor.

Tradency service is available through selected forex brokers, including several major retail brokers, such as FXCM.
Tradency system performance data is hypothetical rather than based on live account trade logs.

If you´re looking for system aggregator service for forex signals based on live accounts, then is for you.

Myfxbook positions itself more than a community of forex traders rather than system aggregator service provider.
Forex traders allow data from live forex accounts to be explained on Myfxbook website. Potential investors can review the data and contact the trader directly for signal delivery terms and conditions.

AlphaClone compiles data about major equity positions from 200 major hedge funds and institutional investors from their public filings.
There is a time-delay involved as such public filings with SEC are made quarterly. If you feel comfortable to ¨clone¨ positions of, say Warren Buffet, this is the service to use.

Alpari PAMM
Alpari is a Russian-owned forex broker with operations in several countries, including UK and UAE.
Alpari customers may enable their live account performance to be available for public disclosure. If done so, the live account performance is ranked and any investor may open PAMM account to copy the trades of the most profitable traders.
The fees related to PAMM account are structured as performance fee. Under this arrangement, investor pays a share of profits as a performance fee and such fee is shared between the broker and the trader.

Source: free e-book Be Your Own Hedge Fund Manager.

Looking for more trading system sources

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I´m looking for more trading system sources, apart from, and

So far I´ve spotted and marked for further research the following ones:

1. FXCM and Alpari
Both are forex brokers. Brokers, generally, are well-placed to identify the best traders and trading systems. They keep customer funds and have all the trade information recorded on their servers.  At at the time of writing, FXCM  has 2077 systems listed, Alpari – 499.

2. AlphaClone allows investing in ¨the stock ideas of top managers at the time their stock ideas become public¨. There is time delay involved, of course, as funds disclose top holdings quarterly. Basically, information from 200+ funds ¨cloned¨ into 15´000+ investment portfolios.

Covestor’s Most Popular Down 21% in May

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The most popular model manager on Covestor is down almost 21% month to date.

However, the model is up annualized 162% since inception on 10th April, 2010. 20+ percent drawdown is historic maximum drawdown for the system.

Drawdown of this magnitude, after months of good performance, is nothing extraordinary in the system trading world. Happens all the time.

What do you do, if you have a system like this in your portfolio? Quite simple – you pull it from your portofio. You may re-evaluate it later and probably put it back in the porftfolio, but at the moment it’s no-brainer – ditch the system from your portfolio just because it moves out of its historic performance parameters.

Have you lost money? Not at all, if you traded the system correctly. What does it mean to “play it correctly”? You watched the system for about three months in early Y2009, then gauged it’s risk/return profile and put it in your porftfolio. You still made about 100% annualised return on your money while the system was in your portfolio from July – August 2009 till May 2010.

Written by A.S.

May 23, 2010 at 11:17 pm