Some tricks scammers use to game their trading system with 488% gain

The rise in popularity of social sites for trading has paved the way for ever more unscrupulous trading system sellers to spread their high yield scams. Just to be clear, I am not against websites such as Myfxbook and Covestor, nor against trading system sellers in general. However, there are always bad apples in a basket. And there are many bad apples out there.

Trading social sites typically nurture a community of traders by enforcing transparent and audited trading history. Unfortunately, it is because of this claim, people are enticed by trading systems showing unbelievable high yields of 200%, 400%, 800%, or even more in mere weeks on sites such as Myfxbook or Covestor. But if the history of every trade taken is published and the account is verified, doesn’t that mean that they are just really that good?

First of all, if these people can double or triple their accounts in a few weeks or months as they claim, why the heck are they selling their system to you for a few hundred bucks and lose their monopoly?! If you have a Lamborghini in your garage, do you rent it out for a few hundred bucks to total strangers? Common sense should be on red alert.

For sake of argument, let’s say that you give them the benefit of the doubt. All is not as simple as it seems though. Here is one old trick in the book scammers may use to game a transparent and audited trade history. I will use one of the top performers currently on Myfxbook to illustrate how their scam work. And surprise, surprise, this particular system is on sale for a limited time (will see why later) for only US$365.

Figure 1 is the account percentage growth graph of this particular system. 488% gain in 4 months!

Account growth chart

Let’s take a look at the trading performance statistics. Remember, these are real, audited numbers.

Trade performance statistics

Aside from the impressive 90% success rate (something only Goldman Sachs can achieve consistently), the rest of the numbers actually look quite normal. Notice that their average pips won and lost are both around 13 pips. So this is supposedly a short-term scalping strategy to catch small but high probability moves. Which does exist in real life, as you know.

Then as if you’re not convinced of their awesomeness yet, here’s a snapshot of some recent trade history.

Trade history

This is where you might start to raise some eyebrows. Observe that 5 out of 8 trades shown are minuscule gains but they have no stop loss in place! That’s not a problem, per se. Some systems don’t use an open stop order. However, notice the open and closing time. These suspicious trades were held for almost a day! That’s like an eternity for a scalping system. Who knows how much drawdown have occurred in the account during those hours! Actually, we do, take a look at the figure below for an open order of this system.

Open trade

Caught red-handed! The open order shows a gigantic loss running. See the -$9290 loss being held? That’s about a third of their current balance of $29k! But here’s the trick. What the system does is wait for market noise to swing the price back to breakeven and then close the trade for a +1 pip. As the trade isn’t closed at the moment, this humongous drawdown doesn’t count as a loss and is nowhere to be seen in the trading history. That is what happens with many of those unusually small pips but long-held trades as discussed above. In effect, they are risking their entire account balance on just a few pips of profit on every trade.

The reason why many of these unbelieveable systems typically have a trade history of only a few months at most? That isn’t just for show. Sooner or later, their luck runs out with this no-stop rule and the market will have them choke down those monstrous losses. Eventually, their account just blows up. But at that point, they can make a switch-aroo and pull up another trading history that hasn’t blown up yet to replace this one that just failed. Then it’s business as usual.

What’s more amusing is thatsomeone asked this question of why there is a huge drawdown in another huge drawdown open trade months ago. The response from the author is that it was just a careless programming mistake. Imagine, here they are selling a massively “profitable” system on one hand and then claiming a glitch on another.

In summary, the key to a statistically 100% winning system is simple. Follow the trend with no stop and only close a trade with a positive gain. But as I’ve explained the fallacies with this approach above, never try that with your money as you are risking all for so little!

For general advice on avoiding forex scams, the Wikipedia entry offers an overview and ForexCrunch has a good article on 7 Ways to Avoid Forex Scams.

AUDJPY Short 81.37/77.17: Anatomy of my first 400+ pips trade

420 pips in my demo account to be exact. Still, I feel very lucky.

In this post, I will review why I entered this position, why I added to it, and why I exited. The goal is for myself to learn from what works and what can I do to improve on this trade given some hindsight advantage.

The Signal

See Figure 1 on the daily chart of AUDJPY (first entry price pointed with blue arrow). Notice the lower highs, with the 2nd high inside my fChannel and the 3rd (last, just before entry) high below a yet longer term fChannel. Plus 1 point for the lower highs and another 1 point for the highs moving into the channels. Two points here.

AUDJPY

The Choice

While both AUDJPY and AUDUSD seemed promising. I focused on AUDJPY because the Yen seemed better poised for strength. I discussed my method of choosing a better counter currency for trading in another post, so I won’t discuss it here. However, as this trade became more and more obvious and into the green, I diversified my short by adding shorts in NZDJPY and NZDUSD. Those two netted around +100 and +250 pips also.

Another plus 1 point for picking and choosing.

The Confirmation

What really gave me confidence in this trade is the price action in gold in comparison to the Aussie. Figure 2 shows the Gold Futures price (/GC, lower left) and Australian dollar futures (/6A, middle left). Notice that gold has been trending up steadily for days but the Aussie made a lower low. That’s a negative divergence. Plus 1 point.

4-hour charts of forex markets, gold, and crude oil

The Timing

For timing this trade, I observed the intraday movement of AUDJPY, EURUSD, and other related pairs. The most obvious sign of Aussie weakness was from comparing the price action of EURUSD and AUDJPY. The 3-hour charts of EURUSD and AUDJPY are shown in Figures 3 and 4, respectively. Notice on Nov 24 and 25, EURUSD trended higher and made a new high. At the same time, AUDJPY barely moved on the 24th and squeezed even more on 25th. The difference was even more noticeable when I was watching the 30-min at the time. I had thought that my datafeed was lagging when AUDJPY barely moved yet EURUSD was rocketing up.

Plus 1 point for the 3-hour price action and then another 1 point for the 30-minute price action (not shown).

EURUSD, 3-hour

AUDJPY, 3-hour

The Entries and Exits

Six points total for the trade, time to establish a position. You can see my orders in Figure 4 above. My first entry was Nov 25 15:12 at 81.37 with a half position. It is marked by a yellow triangle at the cliff beforethe dive (how lucky). I added another half that evening 23:06 at 79.94. I was waiting for a 50% retracement to 80.50 to add but that didn’t seem to be happening. So I added 1/2 when AUDJPY failed to break 80.0 with a strategy to add another at 80.50. But 80.50 never happened and it took another dive.

My exits are determined at the time as usual by using stops. I simply keep moving the stop along and narrowing them once we break support level. After the move became vertical, I zoomed out to the daily chart to view potential targets. The 77.0 and 76.00 levels (as shown in Figure 1) became my not-be-greedy targets. I had my stops really tight at those point and even had a take profit set for half the position at 76.0, but that level wasn’t tested before I got stopped out.

The two red dots at 77.17 and 77.08 are my stopped exits as shown in Figure 4′s last bar.

The Conclusion

What made this lucky trade happen is that I had spent a lot of time analyzing it from different perspectives and watching the intraday price actions for days. I also took my time to scale in and out to minimize my risk. To make this a habit, I will use this point counting system from now on to help me analyze more and trade less.

One thing that I’d like to improve upon is to be more aggressive on a winning position. How? That will be saved for another post when I figured it out.

How to use FX futures to narrow down which forex pair to trade

A problem I have is that once a currency pair shows a viable trading setup, other related pairs often show the same setup too. A reason for this phenomenon is that markets don’t operate in a vacuum. When markets really move, everything move together. So the highly correlated markets can scream for entry at the same time. The real question though, is which one should I put my chips in?

There are limitless methods on how you can approach this. The one I’ll talk about in this post is a simple method of comparing your candidates using the currency futures. Why use the futures? Because they provide a standardized platform, which is essential when comparing things. As a bonus, there is a US dollar index futures to help with analysis of the dollar. Not a trivial process on its own.

I will explain my method by way of an example. This morning, I was considering to go long in AUD/JPY, CAD/JPY, AUD/USD, or short USD/CAD according to signals from my FTC setup.

Sure, I could have just choose which one to trade based on the RSI rating or some other indicator. But I don’t put much faith in indicators for various reasons. So a method I typical use is to just go through the charts to manulally identify which has better reward/risk or better support/resistance. As you can imagine, this is very time consuming.

In practice, I only compare AUD/JPY vs. CAD/JPY and AUD/USD vs. USD/CAD, and then compare the winners of those two matches. Like in a tournament. Not that much of a hassle but the issue with this approach is that I’m adding another layer of uncertainty with all these unscientific comparisons. That could have a significant negative impact on my trading.

In a good trading strategy, every step taken should be to improve your probability of success or the reward/risk ratio. As such, it’s better to keep my process simple.

This is where the currency futures indices is of value. They provide a big picture perspective and serve as a standardized data for comparison. Using my example, I needed to choose between shorting US dollar or Japanese yen (I repeated the process for choosing AUD or CAD). Figure 1 below shows the 4-hour chart of both currencies for the past 10 days. It’s evident from the chart that the US dollar is in a range and the Japanese yen (actually it’s JPY/USD) is moving up. 1 point goes to US dollar trade.

Next, I identify the strength of the support/resistance to estimate in the case that the trade goes against me, which would have better cushioning. It’s a crude form of risk estimation.

From the figure below, see that the dollar has a clear resistance just below 76 and it is currently stretched away from the cyan-coloured moving average. Whereas the yen is near a recent top with no prior occurence and it has been sitting above the moving average for a while. Another point for dollar short.

USD 2 : JPY 0. Consequently, I went long AUD/USD this morning instead of AUD/JPY.

This is by no means a vigorous methodology. I’m not saying that shorting US dollar is a good idea from this simplistic comparative process. It’s just that my setup tells me to go long AUD/USD or AUD/JPY, this is just a quick and easy way to help me decide which trade to take. Nothing more.

As an aside, some people may prefer to use currency ETF, UUP and FXY, instead. But I don’t like to use ETF as a data source as the price is noisier because they are affected by other factors.

US dollar and Japanese yen futures indices

A good trade that could have been great: a lesson to take profit at target

A profitable trade is definitely a good thing. But when you sit idly to see good profits turn into great profits, and then doing nothing to lock in some of that windfall, it is time to review your trading strategy. That is exactly what I have done last night when I saw my AUD/JPY shorts took a 150 pips dive at the Sydney open to pass a strong support. And it wasn’t AUD/JPY only, all my 4 other pairs also pushed about 100 pips deeper into the green to test their respective supports. But as quickly as those unrealized profits appeared, it was quicker that they evaporated.

While I had 5 positions last night and they all fit this scenario, I will use my AUD/JPY short for this particular case study as it was the most dramatic and easy to read. Here is a brief summary of my AUD/JPY shorts.

Figure 1 is a 3-hour chart of AUD/JPY showing my entries and exits. I entered twice on Oct 29 (83.76 and 82.47, marked by yellow triangles) and was stopped out with profits on Oct 31 and Nov 2 (81.7 and 81, marked by red dots). The trades ended up +147 and +206 pips with 1/2 the position size each. As shown in Figure 1, I did manage to capture most of the down move nonetheless. So these weren’t badly executed at all.

(I used my FTCS 0.1 as the trading setup, so I won’t go into the logic behind my entries and exits here.)

What I’d like to point out though is the long tail candlestick poking through the support at 80.0.

From Figure 2 daily chart, it is apparent that 80.0 for AUD/JPY is a strong support from prior congestions. Not to mention that it’s a nice whole number. As such, it was naive of me to think that AUD/JPY could break and maintain this depressed level on thin volume on a Sunday (EST) Sydney open.

Secondly, also note that in Figure 2, the fall in price of AUD/JPY is quite extended as shown by the RSI’s dive from 90+ to about 40. Even if the pair is poised for further weakness, there’s bound to be some catch of breath before it can take on a strong support.

From the above 2 observations, which I did see at the time, it’s evident that I should have taken some profits (i.e. half of my positions) when I had the chance. I knew in my mind that 80.0 was hard to break, but instead of exiting on target, I merely tightened my stops in hoping for more gains.

Don’t get me wrong. Using stops for entries and exits have served me well and it will still remain my primary trade order method. But if I’m to improve, to go from +200 pips to +300 pips in a trade, I need to be able to spot and exploit other tools at my disposal when extraordinary occasions such as last night’s appear.

So what can I do in the future to prevent this from happening again? With 2 simple additions to my trading strategy:

• Set a profit target and take some chips off when the market reaches target at extreme conditions.
• Keep these profit targets up-to-date according to the trading setup.

Notice that this is analogous to what I have already been doing with my stops by moving them closeras the price action dictates. However, one important caveat to this technique is that this should never override the fundamental trading rule of letting profits run. I will only take profits at a target if the price is severely over-extended according to my trading setup.

In any case, as Ancient_Warrior wrote to me on Twitter, “Well don’t ‘kick yourself’ too much for 200 pip gains please! lol”

AUD/JPY, 3-hour

AUD/JPY

A lesson on the importance of fundamental awareness for a technical trader

I paid a price last week in trading EURCHF for not knowing the fundamental analysis about the currency pair. First of all, here’s how my trade played out. The support between 1.500 and 1.510 is apparent if you look at Figure 1. So I went long as shown in Figure 2 (second blue triangle from right) based on a positive divergence at a strong support of 1.510. EURCHF stayed range bound for a over a day while my other positions were having roller coaster rides. That’s when I decided to tighten up my stop on my EURCHF long from 1.508 to 1.5095 to limit my risk exposure.

As you can see in Figure 2, that was a bad decision. On October 30, EURCHF made a swing downward to take out the nearby stops and then launched upward right past my target. That would have been a quick and low risk play if I hadn’t micro-manged the trade and moved my stop up while the daily setup was still sound.

While getting stopped out is part of the game, as there is never absolute certainty in a trade. But in this case, the probability of this up move was substantially greater than I would have guessed. The extra bit of information lies outside of the chart. It seems that there is a well known secret that the Swiss National Bank (SNB) has been intervening in the market to keep the Swiss Franc from being even more overvalued. In particular, it’s well known that the SNB has their eyes on the 1.50 and 1.51 levels in the EURCHF pair.

SNB publicly announced their intention to intervene on March 12. Immediately following the news, the EURCHF pair exploded up 470 pips in 20 minutes that day. If you look at Figure 1, you can see that gigantic bar on March 12. The DailyFX has an article on this monumental event. Since then, the SNB has been coming to the rescue of EURCHF in very obvious ways as shown in Figure 1 with the regular spikes in prices.

Prior to this October 30 move, EURCHF had an identical price action exactly a month before on September 29, as shown in Figure 3. Back then, EURCHF also had a positive divergence on a test of support at 1.5080. Then next thing you know, the pair popped over a 100 pips. Obviously, the SNB is trying hard to paint the tape on the monthly chart of EURCHF.

As I was saying, the SNB is intervening in the market to keep their currency from further over-valuation, which is hurting their local economy. In both cases of Sept 29 and Oct 30, if the support was broken, EURCHF would have stepped into a grave on the chart. Just look at that huge vacuum below 1.50 on Figure 1.

In this recent case on Oct 30, even though I did go long because of the chart, I didn’t have the edge of knowing this information. Which led me missing this easy ride because I didn’t have as much conviction in this trade as I should have.

Coincidentally, as I have been aggravating to improve the win rates of my trades, this came hitting me right on the head. So while I’m no economist, I should at least be aware of the fundamental forces at play in the currencies that I trade. At the end of the day, technical analysis may provide guidelines to the mass psychology behind price actions, but it is the fundamental and economic forces that are ultimately driving the market.

EURCHF

EURCHF, 3-hour

EURCHF, 3-hour on Sept 30