It began with the advances of downloadable trading software and the retail automated trading algorithms back in 2008. Back in those days, web sites popped up that offered programs or “Expert Advisors” that promised to print you money while you slept. What a great idea: You never have to learn anything, just buy the program for $100 – $500, set it up and then go and play golf. It took a number of years but the retail trader world finally learned that these “robots” became obsolete quickly and did not perform any better than an uninformed gambler over time.
Over the next few years, this concept of no work and all automation has evolved thanks to advances in technology. In more recent years, you have the rise of “Social Trading” in which you can link your account to the account of a “successful trader” whether it is a discretionary method or automated strategy. Same idea in a different form: Link your account to someone who has shown good performance recently, and then go and play golf.
There are a handful of websites that offer this type of capability. I am not going to name names here. Instead I want to explore why this concept has not overtaken the entire industry. Why would any retail trader want to go through the learning curve and stress of trading for yourself when you can link to an expert for a small cut of profits? It’s better than the hedge fund model because you have full control of your funds, and you can decide how much size to allocate to your trader of choice. So what if they get a % of your spread, you were paying that anyway. So it’s just a matter of selecting good performers.
On the surface it sounds great. No work and all automation all over again. The problem is, it doesn’t work. It is just another gimmick in the gimmick assembly line. The question is why? There are a collection of reasons. I am going to highlight just two.
Reason 1: Technology is not mature enough or incapable of mirroring executions. Not too long ago a friend of mine did an experiment and set up an automated trading strategy at 3 different dealing desk brokers. After one month he carefully audited the results trade by trade and discovered something strange: same exact entries for each broker with similar time stamps, yet one broker showed a profit, one broker even and one was a significant loss. How can this be? Same strategy, same executions? The problem was the exits. And since each broker quotes its own market, and handles orders differently, the automated system would exit a trade for a profit at one broker, but would never get filled at another which eventually would result in a stop out. These are the issues when working within the limits of an OTC market.
Now imagine this in terms of social trading: You link to your expert or “signal provider”. That trader or algorithm executes a trade at its respective broker and gets filled. Your account receives the signal but you use a different broker with different spreads and guess what, you don’t get filled. Or worse, you get filled and the signal provider exits on a limit order while your same limit order never gets filled because of your broker’s variable spread. Your signal provider books a profit, your account books a loss if the pair you were in is too noisy. This is especially problematic for very short term strategies like day trading.
Reason 2: The majority of the signal providers are not real traders. They are programmers who are able to create numerous strategies that will show good performance randomly. They know that the “robot” or method is only good for a short time. You don’t. They introduce their system into the selection, if it randomly performs, they get paid by the broker if they generate a lot of volume and they get a piece of the profits they generate in your account. When the system loses and falls out of favor, they simply generate hundreds of them until they find one to introduce to the system to start the cycle all over again and you just absorb the loss.
Is there any value to these social trading networks? In my opinion not too much. The lesson here is there is no easy way out. If you want to generate profits as a trader you must make a serious commitment of time and money. If you are looking for an expert to trade your money, you will not any real value here. True experts are able to attract large amount of capital which require them to be licensed and provide detailed disclosures about their strategies, performance and who they are. Professionals don’t use online nicknames and present you with a simple graph showing only 3 months of performance.
Remember the forex business is notorious for these types of offerings. You must always do your research and learn as much as you can about the website, educator or manager that you are considering doing business with. The reason why these sites can still operate is because their message is powerful, and there are enough people who don’t bother to inform themselves and continue to open these accounts and support these signal providers. Eventually, just like the robots of 2008, they will run out of support and will have to come up with another way to keep the easy money illusion going.
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Marc Principato CMT
