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Fraud Advisory from the CFTC: Commodity Trading Systems Sold on the Internet
Beware of websites selling commodity trading systems that guarantee high profits with minimal risks.
The CFTC has seen an increase in the number of Internet websites fraudulently promoting commodity trading systems and advisory services. These websites falsely claim, among other things, that advertised performance results are based on real trading when, in fact, the results are based on hypothetical trading.
No trading system can guarantee profits! The CFTC urges you to be skeptical when promoters of trading systems and advisory services claim that their products and services will earn high profits with minimal risks. Always remember that whether or not a trading system is used, commodity futures and options are typically high-risk endeavors.
Be warned that systems which trigger frequent trading signals as part of a day trading strategy can result in substantial commissions and fees.
What Are Commodity Trading Systems?
Commodity trading systems typically are computerized programs that signal members of the public when to buy and sell commodity futures and options contracts. Systems produce buy and sell signals based on mathematical formulas and are typically based on technical analysis of trading data (trading volume and prices), as opposed to fundamental analysis (analysis of economic factors such as supply and demand).
Trading systems that are based on technical analysis attempt to predict future price movements based on historical prices, price relationships, and price trends.
Hypothetical Trading Results Can Be Unreliable
Many trading system promoters advertise their systems by reporting hypothetical trading results.
Hypothetical trading results typically are based on trading simulations using historical price data or simulated "real time" computer trading.
To obtain these results, trading system promoters typically pretend that they traded futures contracts at market prices that occurred some time in the past. They then calculate the trading results that these purported trades would have achieved had they been placed, based on actual historical prices. These results often show impressive trading results and large net profits with only a few, small margin calls.
Limitations of Hypothetical Trading Results
- Hypothetical results do not reflect the results of any actual trading whether they are based on historical data or simulated "real time" trading. In other words, there is no actual futures account, no actual investment, no actual trading, and no actual profits. The hypothetical results are purely the product of simulation.
- 20/20 hindsight with historical results: since the trading systems that produced the results were not actually traded under real market conditions, the purported results fail to take into account market circumstances that affect traders and their decision-making process, such as anticipated news events that could have an impact on the supply, demand, or price of the commodity.
- Real-time is not real: when marketing trading systems, some promoters claim that their systems have performed successfully in "Real-time Trading." This means only that the system has been tested using a live data-feed, rather than being tested using historical market data.
Remember though that in real-time trading, no trades have actually been placed in the market. Performance results based on real-time trading are merely another form of hypothetical results, with the same limitations. - Financial limitations: hypothetical results may not adequately take into account the ability of a trader to absorb trading losses or to meet margin calls. Trading systems assume that the trader can withstand all losses generated by the system and can meet resulting margin calls.
It is much easier to absorb a trading loss on paper (hypothetically) than to do so in reality. Many traders find it unacceptable to sustain several consecutive trading losses and/or margin calls. Moreover, in an actual trading environment, a trader's financial condition may change over time and affect his or her ability to continue following a trading system. - Not tested under real market conditions: hypothetical trading results assume that futures contracts have been bought and sold at specific prices. Since these assumptions have not been subjected to actual market conditions, they may overestimate or underestimate the performance of a system.
Some market conditions may make it impossible to execute a trade; for instance, many systems assume that stop-loss orders will be executed at their stop price. Under actual market conditions a stop-loss order might be executed at a better or worse price, or not be executed at all.
Actual market conditions include bid/ask spreads which might not be reflected in the prices used in hypothetical trading.
Moreover, the actual execution of a trade could impact the price paid, especially in less liquid or illiquid markets.
- Possible rigging of results: you should be alert to the possibility that the system promoter manufactured results by selecting historical trades that would have yielded the greatest returns.
- Trading and system costs: profit claims of promoters may fail to take into consideration the cost of purchasing or leasing a trading system. While the prices of systems vary, many are sold for thousands of dollars and most of these systems require that the user obtain a data feed from a vendor.
System promoters may also fail to take into consideration the impact on profits of commissions and fees charged by brokers in connection with futures and options trading. Such commissions can have a substantial effect on profitability, particularly when the system generates frequent trading signals.
A user should take all of these costs into account because they raise the break-even point in trading.
Because of all these limitations of hypothetical trading results, CFTC rules require that the presentation of hypothetical trading results be accompanied by a specific cautionary statement warning of the inherent limitations of these results.
If you are considering trading commodity futures or options, you should educate yourself about futures and options and be aware that you may lose large sums of money.
Is a Futures/Options Trading System Right For You?
- Do you have the financial ability to sustain trading losses and meet margin calls? When trading futures contracts on margin, you risk losing much more money than the initial margin amount. If the market moves against you, you may be required to pay additional funds. The use of margin creates potentially large exposures to loss.
- Can you lose your entire investment and more without a change in your lifestyle?
- Do the trading results sound too good to be true?
- Are the advertised trading results based on actual trading or "hypothetical" trading?
- Has any trader used the system in actual trading? If so, how has the trader fared?
- Will the system promoter provide you with independent verification of the claimed trading results?
- What is the total cost of the system?
- Have you factored into your purchasing decision the impact of commissions and fees that can result from frequent trading?
- What are the additional costs of the system (data feed, etc.)?
- What is the status of the system promoter? Not all system promoters are required to be members of the National Futures Association or registered with the CFTC. Check their registration and disciplinary status with the CFTC and the NFA.