This is a total profit of $820 for January.
But wait, 41% of $10,000 is $4100.
What is going on here?
The problem is that, trades that overlap only involve a portion of
your entire capital. In order to accurately figure out the
total portfolio return on trades that overlap, you must use the AVERAGE percent
return and not the TOTAL percent return.
You REALLY made 41% / 5 = 8.2%. 8.2% of $10,000 is
$820.
In our example, using just 5 trades, there is a 32.8% difference
between what you REALLY would have made and what they claim.
Now, think how grossly inaccurate the yearly return will be on a
site that has made 150 trades for the year!
Many sites do not account for trade
overlap.
Incorrectly calculating returns on trades that overlap is especially common for services using
"averaging down" (and "averaging up") as part of their trading
strategy. Averaging down is when you buy more of a security at a
lower price than where you originally purchased it to reduce your
average cost in the position.
The reason why averaging down is
problematic when calculating past performance is because some services
fail to apply additional weight to trades which were averaged down
when calculating the overall return.
For example, imagine that in January
you started out with $1400 in risk capital.
For trade #1 in January, you bought
100 shares of ABC stock at $5 (for a $500 investment) and you sold it
at $6 for a $100 gain or 20% profit on your $500 investment.
While that trade was still opened,
you bought 100 shares of XYZ stock in January at $5 (for a $500
investment) and then another 100 shares of XYZ a few days later at $4
due to the stock dropping (for a total investment of $900).
Your cost basis per share for the
position in XYZ is $4.50 (($4 * 100 shares + $5 * 100 shares) / 200
shares).
Now, let's say XYZ moves from $4 to
$4.50 and you sell. You close the trade during January at $4.50
or a 0% return (your cost basis was $4.50 and you sold it for $4.50).
To calculate the January return, some services will simply take the
average between the two positions (the ABC and XYZ trade) and report a
return of 10% ((20% + 0%) / 2). This is incorrect. 10% of $1400 = $140. But you only made $100.
(($100 / $1400) * 100) = 7.14%.
Of course, this is assuming you had
enough risk capital to buy another 100 shares of XYZ. If you did
not, your return would actually have been 5% since you invested $1000
total and on ABC you made $100 and on XYZ you lost $50. (($100 -
$50) / $1000) * 100 = 5%.
Later on, we will talk about how
averaging down can be used in a different way to artificially adjust
performance numbers.
Thanks to the "fuzzy math" trick,
many sites using it post money back guarantees.
"If we don't show a return of X amount each year (or each month),
we will refund your money for the entire year (or month)."
On sites that use fuzzy math, you
have little chance of cashing in on this guarantee.
One well known software company has a
performance guarantee in which they promise you will be profitable
with their software. Then, a few paragraphs below this, in their
disclaimer, they state they cannot guarantee profits if you use their
software.
Not only is a guarantee like that another misleading trick, it also
is a big no-no in the eyes of the Securities Exchange Commission.
The SEC frowns upon a guarantee of any kind being posted on an
investment site.
In fact, misleading returns have
gotten some services in legal trouble. Some of our current
competitors have been sued by the SEC for violations of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 there under and
violations of Sections 206(1) and 206(2) of the Investment Advisers
Act of 1940.
Their misleading calculations are nothing more than a weak attempt to
deceive you into
joining their service.
The next tactic some sites use is
meant to
artificially inflate a service's win ratio.
Some sites claim to have ridiculous
win ratios like 100 winners and 0 losers since inception.
What may not be obvious to you is
that a majority of the sites claiming unbelievable win ratios hold
trades that move against them for many months while new
recommendations continue to be given during that time.
To you, it really doesn't matter what
other trades are recommended during that time or what alleged returns
are made because your capital is tied up.
It may look good to report a win
ratio like that but it is not at all realistic.
Even worse, they may also keep
averaging down / up the losing position so that when it is eventually
sold, they actually show a profit!
One website, for example, that does
one trade a month had a losing trade at the beginning of the
year that was held the entire year and ultimately closed at the very
end of the year for a breakeven trade. Yet, during that entire
time, new trades were opened each subsequent month. So, they reported a 100%
win ratio and a very good return for the year.
The problem is that, realistically,
you would not have made a dime since all your capital would have been
tied up in the losing trade all year.
A website may try to side step this
technicality by stating they may open multiple trades at a time,
say 10. There is nothing wrong with that except for the fact
that, if you wish to mimic their performance, you can only invest a
maximum of 10% of your capital in each trade.
So, if you have $100,000 to invest,
you are investing $10,000 in each trade. However, if most of the
time you are actually only in 5 of the 10 possible open trades, you
are only making a return on $50,000 of the $100,000. You can't
start investing more because as soon as you do, 10 trades may be
opened at once and then you will miss trades.
Other services post returns based on
"maximum potential" or "potential profit" meaning what you
"could" have achieved assuming you sold at the highest point the trade
was open or bought at the lowest point (completely unrealistic).
Gains should not be based on entry to
"peak value." They should be based on clear instructions on when
the service told you to exit.
Markets can move quickly due to a
variety of reasons like earnings, interest rate changes, sudden news
announcements, etc.
In a fast moving market, it is
unreasonable to expect that you will get a complete execution at
exactly the price you want.
For example, a service may state to
buy ABCD if it breaks out above $50 using a buy stop. If the
stock is at $49 and a sudden positive news release occurs, the stock
may spike from $49 to $51 in a very short period of time. As a
result, your buy stop at $50 may not actually execute until $50.30.
However, the service may end up
recording the buy price as $50. This is called slippage and must
be accounted for.
Or, in another example, ABCD is
trading at $40 and a service recommends buying at $39.50. So all
their customers enter a buy limit for $39.50. Let's say this
represents 10,000 shares.
The stock might drop to a low of
$39.50 for a second and execute only 1,000 shares before rallying.
This is called a partial fill. It would be wrong for the service
to record the execution at $39.50 without accounting for the fact that
it was a partial fill. Yet, many companies won't make any
adjustments whatsoever.
Be careful of services that post
returns many years before the service even began. If the service
opened in 2005 and they have returns posted beginning in 2000, there
is something fishy going on.
The opposite is also true. If a
service opened in 2000 yet only has returns going back to 2005, be
suspicious.
One service in particular that
routinely copies various ideas from our website decided to take a page
out of our book and start warning people regarding accurate returns.
(As a side note, we actually caught
an employee of this business trying to join our service to see what
all the buzz was about.)
Although it is imperative that the
public be aware of deceptive reporting, the service should probably
practice what they preach.
The service talks about how many
companies are dishonest and use a variety of tactics to disguise their
weak performance (sound familiar?).
The company then goes on to boast
that they are not afraid to show you all their results, winners and
losers.
What this service neglects to tell
you is that they had another prior service that experienced a very bad
losing streak. In an effort to hide this losing streak, at
first, they decided to start anew and post only performance that
occurred after the bad drawdown period.
Possibly due to complaints, they then
decided to post all their performance but they "hid" their bad
performance in a different location.
After determining this was not
sufficient, they decided to completely abolish all the performance,
re-title their strategy, change their business name, and start all
over.
Although this service does routinely
replicate aspects of our site (as does many other websites), it was
one of the few that we actually respected when it came to honest
reporting.
However, after this stunt, we can add
yet another service to a list of others that decide to put honesty and
integrity in the back seat and profits in the front seat.
Wicked Profits has actually been
criticized for posting all performance numbers going back to the very
first day we opened. Some people feel every slight change we
make to the service should result in a "reset" of our returns (most
likely, this criticism is from a competitor in disguise).
Beware of services that post only a
few big winners but hide actual performance numbers. Nobody
cares about one trade that made 40%. What about the next four
that each lost 50%?
You want to see overall
performance....not the biggest winners for the year.
One service we know of posts
hypothetical results that change each time the service has a bad
month. What happens is, when a bad month occurs, they just
re-optimize their system, fix the bad month, and post new past
performance numbers.
One website, that sells naked options
and performs credit spreads, often posts performance numbers contrary
to the instructions given to customers.
They issue a recommendation to close
the open trade because it is moving against them. But, if
at option expiration, the position would have ended up expiring
worthless, they will update the return to reflect a profit reasoning
that if you went against their instructions and just held the trade,
you would have made a profit.
These are just some of the methods
other services use in order to achieve too good to be true returns and
win ratios.
Companies know 90% of the people
out there decide whether or not to join a service based on past
performance alone. They wait to ask questions until they have already joined and
are stuck in a losing trade for 3 months while the service continues
to recommend winning trade after winning trade.
Wicked Profits is well known by our customers as a company having
an enormous amount of integrity and honesty. We do not play
games when it comes to posting our returns, win ratios, etc.
This is why we have so many happy customers and why our service had to be
closed from August 1st, 2004 to May 8th, 2005. In fact, some of
our competitors have blatantly copied text from our site in an attempt
to replicate our success.
Our customers are well aware that
maybe our returns are lower than other services but they are also well
aware that our returns are honest, valid, and can be closely
replicated.
A return that is five times the
return of this service means little if the return is calculated wrong
or if you were somehow expected to be 100% invested in 5
recommendations sometimes and other times be 100% invested in 10
recommendations.
A win ratio that is 100% means little
if you are expected to have made many trades throughout the year while
still being fully invested in a losing trade that was held for 300
days.
We respect sites that choose
to post no returns at all since at least they are hiding their
performance as opposed to trying to manipulate it. If a site
does not post past performance but instead uses testimonials to get
you to join, you should move on.
A service with good past performance
should let the numbers speak for themselves instead of relying on
testimonials from people that had one good trade and decided to email
the company. If the numbers are good, no testimonials are
needed. If the numbers are good, why not post past performance?
In fact, the SEC
actually forbids registered investment advisers from advertising their
services using testimonials.
Watch out for services that
repeatedly "average down" (or "average up") in order to avoid posting
losing trades. Averaging down, as we defined before, is when you buy more of a security
at a lower price than where you originally purchased it to reduce your
average cost in the position.
Earlier, we talked about how services
averaging down may incorrectly calculate past returns. Now, we
are talking about using the average down strategy to completely hide
bad trades all together.
While there is nothing inherently
wrong with averaging down, it becomes a problem when you are expected
to have an unlimited stream of risk capital to keep buying the same
size position over and over again to adjust your average entry price.
For example, although you may see a
breakeven trade on the past performance page, what you may not know is
that the position was averaged down three times before ultimately
being closed which means if you did not have the ability to buy the
exact same size position as your original three more times, your
return would not match the return posted.
The next gimmick that companies use to
manipulate their past performance is known as the "rollover"
trade. This applies to services that recommend option trades. Many
services refer to the use of a rollover as a repair strategy.
Since options expire, you can only hold
them for so long. This means that if a currently open option trade
is losing badly and it is time for that option to expire, the
trade has to be closed or settled and the loss has to be realized.
A rollover is when you close an option
position and then immediately open a new option position similar
to the original with an expiration date further into the future.
Notice in the statement above, we clearly
defined a rollover as when a current position is CLOSED and
then another similar position is opened.
For some reason, many services believe
that a rollover is the same trade meaning they don't have to mark
it as a loss and record it as such until they decide to stop
rolling the position.
So, what a service will do then is keep
rolling over a losing position again and again or just one time
but with an expiration date very far into the future.
The goal is to keep the trade open until
the position actually turns profitable, until the loss becomes
small enough that they are willing to report it, or until all the
customers that know about the open trade have cancelled.
When new customers join that aren't aware
of the trade, it can just "disappear" from the books and nobody
will be there to dispute it nor will it ever be recorded as a
loss.
Most services purposely make no indication
in their performance that a rollover occurred.
Another way a service can use rollover
trades to distort their returns is to offset the loss of one
credit generating trade with the possible profit of another
credit generating trade in the same month.
I don't want to get too technical but a
credit generating trade is one that does not require money to open
but rather brings you in money when you open it. You do however
have to put up collateral in the form of cash just in case the
trade is not profitable.
Although the possible profit you can make
on the trade is immediately reflected in your account when the
trade executes, the profit is not realized until the trade is
actually closed or expires.
Let's look at an example to illustrate how
this technique is used in real life.
Let's say a service takes a 50% loss on a
particular trade. They issue a new rollover recommendation which
may generate a 50% profit when it expires 6 months from
now.
Instead of recording a 50% loss now and
then 6 months from now a 50% profit, they record both returns in
the same month. Then, if the new trade is successful 6 months from
now, instead of showing a 50% profit, they show 0%.
Essentially, they therefore claim the
rollover trade allows them to time shift their possible profit 6
months ahead.
If they want to record returns based on
the date the credit is brought in (when the profit is still
unrealized) as opposed to the date the trade is closed, that's
fine assuming that they are consistent in doing this and they do
not record the return until it is actually realized.
But it is wrong for them to record the
return on one trade based on the date it was closed and another
based on the date it was opened, especially when the open trade's
possible profits have not yet been realized.
Imagine this scenario:
1) You open a credit type trade in
December
2) You close it in January for a 40% loss
3) You open another trade in January that
makes you a 40% unrealized gain immediately but will not be
realized until option expiration in February.
If you record returns based on the closing
date, you would have a -40% return in January and a +40% return in
February (assuming the trade is profitable).
If you record the returns based on the
date the trade is opened and the credit for the trade is brought
in, you would have a -40% loss in December and a +40% gain in
January.
You cannot however include both numbers in
the same month. Yet many services do just that to hide the loss.
But besides that, there arises two more
problems when rolling over a losing position.
The first problem is that the service will
continue giving new recommendations the entire time the rolled
over trade is open. So, while you are stuck in this trade, they
just keep recommending new ones and recording the performance of
those trades even though you cannot take part in them.
The second problem is that when a position
is losing badly, since you are closing one position and opening
another when rolling over, your balance is going to drop. It then
follows that to perform the sequential trade in the rollover with
the same position size as the original trade, you must deposit
more money into your account. That new capital now becomes risk
capital susceptible to loss.
Even if a service wants to argue that they
said to always keep, for instance, 30% of your total account
balance on the side to handle any possible rollovers, every month
in which no rollover occurred, they would need to reduce the
return by 30% since that money was sitting on the side doing
nothing.
If a customer ignores these directions and
is invested 100%, they are unable to take part in any new rollover
alerts.
While Wicked Profits does mention that a
customer may want to keep money on the side for money management
purposes, we never force them to by suggesting that we may
suddenly issue a new alert which would require additional capital.
Our recommendations are never modified,
adjusted, or rolled over so you could invest 100% of your cash if
you wanted and you can rest assured that a sudden trade
modification alert is not going to occur.
Say, for simplicity, you were in a
position which had an open unrealized loss of 100% and it was
option expiration. In an open and honest world, the service would
record that loss as 100% and try better the next month.
In a dishonest world, the service would
instead issue a rollover recommendation, not record the 100% loss,
use the possible profits of the next trade to offset the
loss, and claim the trade is still open.
The scenario I state above is exactly what
one service did. They gave a recommendation which was worthless at
option expiration. Instead of recording it as such, they issued a
rollover recommendation the day of option expiration, after the
stock market had already opened, to manually rollover the losing
position into the following month. This alert also applied to
auto-traders as well.
Auto-traders are those who have their
broker automatically enter entry and exit orders in their account
when recommendations are issued from their signal provider.
Everyone, including those auto-trading, was required to manually
make the trade. In other words, most people would probably not
have been able to even act upon the alert.
The loss they posted ended up being about
1/3 the true amount. But even worse, the new position they opened
had no upside. It had downside of 100% but no upside. It was done
only in an attempt to hide the first loss and reduce its size.
You place new trades to make a profit not
to reduce a loss. Besides that, nobody could even make the new
trade because in order to do so, they would have had to deposit
new money since they lost their original investment on the first
trade that was closed.
Assuming the investor did have enough
money to rollover the trade and assuming they were available
intraday to take the alert and assuming the trade was executed,
what was the outcome?
They took another huge loss of 90%+. The
new trade that was opened was almost a total loss. This means
whatever additional money you added to your account to make the
new trade would have been lost. Yet, you don't see that loss in
their performance nor do they indicate that any trades were rolled
over in the first place. In fact, we see a hefty profit.
Even if you took a 20% losing trade and
rolled it over and made a 20% profit, you cannot say you broke
even! Since the second trade had less capital invested than the
first, you did not offset the first loss. If you lose 20% on
$10,000, you lose $2000 so now you have $8000. If you make 20% on
$8000, you did not make back $2000, only $1600 yet many services
will say it is a breakeven return.
By the way, you also increase your risk on
a trade by rolling it.
In some instances, depending on the
strategy, size of the initial loss, and how the position is
rolled, it is possible to roll a losing trade and turn it into a
winning trade without requiring any additional capital. However,
by doing so, what you will do is take on enormous risk and create
the potential for an even larger loss simply because the service
won't cut the trade loose and post the return.
Let's continue the example above. Instead
of rolling over a trade and targeting a 20% profit, let's target a
40% profit. So, 40% of $8000 is $3200. $3200 - your initial $2000
loss = +$1200 possible profit without investing a single
new dime! But now your risk has increased significantly. There is
a very high likelihood of you losing even more money.
The more you try to recover your initial
loss via a rollover, the more risk you take on because you
increase the likelihood of taking a bigger loss.
Look, a service that issues rollover
recommendations in an attempt to avoid posting a loss is
manipulating you and their performance. Sometimes you just have to
close a trade, take a loss, and admit the market was right and you
were wrong. This way, you can clear your head and evaluate a much
better trade instead of trying to prove to the market you know
more than it does.
Be careful of any site that only
offers one year memberships (even ones that also include a trial).
They may be
forcing you into a one year membership for a reason. Although
you may like the service during your trial, you may not find out that
they like to hold losing trades for months at a time until month three
which means too late to back out now.
Also, beware of the "annualized"
trick. Some sites post "annualized" returns which got one
website in big trouble with the SEC. "Annualized" is worse than
"hypothetical" when used incorrectly.
Hypothetical is basically "here is
what you should have made if you followed our recommendations but
nobody actually traded them so we can't guarantee you would have made
exactly what we post."
When used correctly, an annualized
return is the average annual return over a period of more than one
year.
When used incorrectly, annualized is
basically "we had a good trade so if we continue to make these exact
same returns in this same amount of time, we will make X amount by the
end of the year."
An example of incorrect use is when a
site is stating we made 10% in 5 days so at this rate, we expect to
make 500% by the end of this year (250 trading days in a year / 5 = 50
X 10% = 500%). Calculating a return like this is crazy. Of
course, they don't explain it like we just did. They simply say
annualized return = 500%.
This is not the correct use of
annualized returns. Mutual funds use annualized returns but they
use it to compute the total return over a period of more than one year
so that they can express the return as a per year rate.
Or, in other words, if they made 10%
in year one, made 5% in year two, and lost 2% in year three, the
annualized (average) return would be (10% + 5% - 2%) / 3 = 4.33% per
year annualized.
The annualized return is not meant to
be predictive in nature (i.e. we made 6% this month so annualized,
that is 12 X 6 = 72% this year).
It is ridiculous to believe a service
would actually use this technique but yet many do.
In order to
replicate the past performance numbers posted on a site, seven things
must be true:
1) The returns must be
correctly calculated. This means returns on trades that overlap
are averaged (not added) and positions that are averaged down / up or
rolled over are
weighted correctly.
This also means future potential
profits on credit generating trades cannot be used to offset an
immediate realized loss.
Services that require you to keep a
certain percentage of your account balance on the side for potential
trade adjustments (like averaging down), rollovers, etc. must reduce
that same percentage from overall returns in which that capital is
not used.
If a service adjusts positions or
rolls positions, the returns on these trades cannot be included in
their past performance unless the rules of the service dictated that
the customer keep money on the side, in reserve, and this amount of
capital was sufficient to make the adjusted trades.
2) You must know, beforehand,
the maximum number of trades that can be open at a time and all the
time, this number of trades must be open.
3) The returns must not be
hypothetical, annualized, or back-tested but rather based on real executions.
This way, slippage is accounted for and customers know that their
results would have been the same as the results shown by the service.
4) Open trades that turn into
losers must not be held indefinitely, to hide negative returns, while new recommendations
continue to be
given.
Services that use the rollover
strategy to hide losing positions fall into this category.
5) Clear entry and exit
instructions must be given and the returns must reflect these
instructions. A site cannot give an exit instruction and then,
after you exit, post a different return because the trade would have
been more profitable if you didn't exit when they told you to.
There should be no ambiguity such as,
"depending on your trading style, you may want to sell here or you may
want to hold your position." That is two separate instructions.
You cannot record accurate performance with wishy-washy instructions
like that.
There is nothing wrong with giving
your clients other options but for performance purposes, you have to
stick with one or the other (sell OR hold.....as opposed to after the
trade gets over, determining which instruction was more profitable and
using that result).
6) If the service offers
auto-trading, the returns posted by the service for a given period
should be very close to the real returns members received that were
auto-trading during that period.
Further, if a customer that is
auto-trading is required to make a trade manually, this trade should
not be included in the performance calculations.
Also, if a partial fill situation
occurs and auto-traders are only able to execute a portion of their
total order, the return on this trade must be reduced by the
percentage of the order that went unfilled.
7) The rules of the service
regarding new recommendations must correspond to what the service
actually does.
If a service states new
recommendations are always given between 4 and 5 PM EST, then new recommendations
must always be given between those times.
If a service wants to adjust a
recommendation the following day at 9 AM EST because of a change in
market conditions, it would be unacceptable to do so since most people
would not be able to modify their order.
Similarly, if a service states new
recommendations can be given anytime during or after market hours,
remember that this means you probably won't be available to trade each
recommendation.
Wicked Profits
meets all seven of the above criteria.
Trades that overlap are averaged, not
added. We do not average down / up positions nor do we rollover
positions.
We never try to offset a current loss
with future potential profits on a credit trade in order to hide a
loss.
Since we do not modify, adjust, or
roll positions, you are never required to keep money in reserve.
As a result, you do not have to worry
about whether your reserve is large enough to cover an adjustment nor
do you have to worry about having capital on the side which is not
invested.
Our customers always know that,
during each option cycle, only one trade will be open at a time so that they can be 100% invested if they want (and can match
the returns posted on our site).
Our returns are based on real
execution prices on real recommendations (not back-tested
recommendations).
Losing trades are never held longer
than 35 days so capital is never, unexpectedly, tied up.
Since we don't issue rollover
recommendations, a trade cannot be rolled indefinitely like some
services do.
We give clear entry and exit
instructions. When an exit instruction is given, the performance
for that trade is recorded as-is regardless of what happened after the
trade was closed.
The return recorded for each trade is
based upon the fill price reported to us by optionsXpress as part of
our auto-trade service.
Trades that cannot be executed
automatically by auto-traders are not recommended.
Slippage is accounted for and so are
partial fills when calculating past performance.
All new entry recommendations are
given by 10 PM EST so customers do not have to worry about missing
alerts. Recommendations are never given intraday.
All services are going to have losing
trades regardless of the strategy they use. It is hard enough
for a customer to deal with a loss but for a service to rub the loss
in a customer's face by attempting to hide it is unethical and
inexcusable.
Although you may pass on joining this
service, we are giving you the
above information so at least you can make an educated
investment decision when deciding what service you will subscribe to.
Honest companies do exist and Wicked
Profits is one of them. Don't let the big group of dishonest
companies mislead you into believing everyone takes part in
performance manipulation. There are still a few of us out there
that practice good ethics.
