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.
Using guarantees
to promise future gains
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.
Some sites will not live up to their
guarantee regardless of what returns they post. They just close
up shop and start again under a new name or they simply ignore your
emails and phone calls begging for a refund.
As we touch upon later, what are you
going to do when a service forces you into a one year membership for
$5000 guaranteeing you a minimum return of 200% in your first 3 months
then, 3 months later, simply refuses to give you a refund when they
lose 75%? Will you post a complaint on a message board?
Will you call your credit card company that kindly informs you that
you are outside the 60 day dispute period?
You are stuck and they know it!
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.
Artificially inflating their win
ratio and past performance by holding losing positions indefinitely
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.
Recording returns on trades that
were unlikely to have been executed by customers due to money
constraints or time constraints
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.
Basing returns on unrealistic
entry and exit levels
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.
Failing to adjust trade results to
account for partial executions and slippage
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.
Showing past performance going
back years before the service even opened
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.
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.
Resetting past returns after a
large drawdown / Altering past performance numbers
that were previously published
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.
Selectively posting big winning
trades while hiding overall performance which includes unprofitable
recommendations
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.
Basing returns on hypothetical or back tested results
There is nothing wrong
with showing back tested results or hypothetical results as long as a
service clearly states that the results shown are hypothetical or back
tested results.
The problem, for you the
customer, is they mean nothing. With back tested results, it is
very easy for a service to produce a winning system based on curve
fitting (or creating a system based on past market history to closely
take advantage of that history with the benefit of hindsight).
A simple example of
curve fitting would be something like developing a system that called
for you to short the market on 10/10/07 and called for you to close
your short position for a massive profit on 3/6/09.
That's fine except for
the fact that you are developing a system based on hindsight knowing
exactly where the market bottomed and where the market topped.
Markets do not remain static. They constantly change. To
expect that the system now would perfectly time a move like that in
the future is unfounded.
This is why so many back
tested systems quickly fail. They are based on the past, not the
future. And, they are too closely tied to the specific stock
market movements in the past instead of being fluid with the market.
Hypothetical returns are
returns on trades that never actually occurred. Again, if a
service clearly says the returns are hypothetical, they are being
honest. However, to you the customer, you have to take
hypothetical results with a grain of salt as real trades and
hypothetical trades can vary greatly. You should not expect to
match the returns of hypothetical trades as too many factors exist
which could cause your results to be significantly different.
In fact, the CFTC
requires services under their jurisdiction to post long disclaimers
related to hypothetical results due to their misleading
characteristics.
Posting performance numbers in
contrast to actual entry and exit instructions given
One website, that sells unsecured 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.
Using testimonials to conceal poor
performance
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.
"Averaging down" or "averaging up"
trades repeatedly to cover up losing positions
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 a company's 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.
Rolling over option positions to
avoid recording a negative return
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.
What some services want you to
wrongly believe is that by doing rollovers, they are "protecting
you" and "not giving up" so as to avoid taking a large loss.
However, what they fail to realize is rolling over a losing
position for say a 50 cent profit is no different than simply
opening a completely different, better trade for 50 cents.
They want you to believe they are
"looking out" for you by refusing to realize the loss but that is
an extremely dangerous and stupid stance. This is no
different than a person that buys a stock at $50 and says he will
sell for a loss at $40 but instead of selling, says I will hold it
and hope it comes back into profit when it goes to $30.
Compare that to the guy that
accepts his loss and moves on to find a much better trade.
So why continue to adjust and mess with a losing trade when you
can go out, find a much better trade, and make the same amount?
Any service that claims they
rollover to protect you and to avoid large losses either doesn't
understand what a rollover is or are simply trying to mislead you
into believing they know some magical strategy that can turn a
losing trade into a winning trade like the guy that holds...and
holds....and holds....a losing stock because he "knows" it will
turn around.
Combining unrealized profits with
realized losses on rollover trades
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.
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.
Showing returns in contrast to actual returns
achieved by auto-traders
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.
It is unethical and borderline
fraud to tell customers that by auto-trading, all entry and exit
orders will be placed for them on their behalf in their account
and then record returns based on trade recommendations that were
given that no auto-trade customer received in their account.
Forcing customers into long term,
expensive commitments under false pretenses
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.
Incorrectly using the word
"annualized" to predict future gains
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.
Summing it all
up
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.
