Don't Let Deception Become Your Reality - Bob Pelletier - President of CSI
Deceptive marketing techniques for trading systems are not necessarily illegal ploys. An advertisement may report facts honestly, but take advantage of the trader's desire to accept an inference of profitability. Over the years many trading methods have surfaced that have made great advertising copy, but could represent likely deceptions. I recall a system of several years ago which predicted the date of an intermediate market turning point within two trading days. The promoter alleged he could do this several years in advance 51% of the time.
This may appear to be an incredible feat until you realize that "intermediate turning points" as the promoter defined them, occur at a frequency of 25 times per year. This is an average of once every 10 trading days. When you factor in the generous "within two days" liberty, you can see that one would expect to be accurate 50% of the time on a chance basis.
The promoter did nothing illegal in his prediction promise. He was telling the truth in his claim, even though he may have had a different analysis for coming up with the same result. The effective deception, if any, was in inferring that such a method can turn consistent profits after commission and slippage. Only the long-term track record of such an approach would tell the true story about the turning point system's merit.
One last detail of this system that deserves mention: A turning point occurs when the market changes direction from up to down or from down to up, but you are not told which to expect. A deception? Of course!
Examining a more recent technologically sophisticated market tool, I do not believe that neural networks are trading deceptions when applied properly. But I have read articles in popular futures industry magazines and other publications which prove that some technicians and writers have taken liberties that create deceptions from them. Labeling a product a "neural network" is not the same as producing a profitable system.
Neural networks have been used successfully to solve some very complex engineering problems. However, the developer who uses the term loosely may have easily ignored one or more basic neural network principals in bringing his approach to the public. Demand explicit, real records before you buy. Make sure the system you purchase has been proven to produce profits in the markets. The profit-and loss record will help prove substance over deception.
DECEPTIONS THROUGH HINDSIGHT ANALYSIS
With the many tool-kit programs available to traders today, the unfortunate tendency of self-deception through curve fitting has been raised beyond acceptable levels. A market trading simulator that takes into account the aggregate of buy and sell prices for simulated trades is likely to project profits that greatly exaggerate the system's real-life capabilities. Why? Because the more control parameters used in creating a trading system, the less likely it is to repeat the simulated past. Failure to consider the high cost of commissions and slippage, particularly on a short-term trading system, can also grossly inflate simulated profits. The trader who ignores these truths is clouding his reality and threatening his bank account.
Deciding what method will bear the test of time and produce consistently profitable results is the necessary step every successful trader must take. A major factor in the success of any trader is how well one differentiates between a real profit-producing idea and one that deceives us into thinking it will be profitable.
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