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Thursday, December 13, 2012

How to evaluate and choose a trading newsletter

I believe there's no substitute for being responsible for your own trading. Making your own decisions and not having anybody else to blame but yourself. But that's something that in order to truly understand, you probably need to spend some time in the markets, getting hurt here, fighting some battles there, getting some disappointments after some services didn't delivered what you thought they would, etc. You need to get some wounds, and learn from them as you lick them.

So, if you are a total newbie I can understand why you want to follow a newsletter. I was there my self, and the fact of not being responsible for trading decisions, the "not having to think" factor was too attractive versus the possible stresses of the "do it yourself approach". And that's fine. Even if you have been for a few years in the market and kind of know what you are doing, you can still find value in subscribing to a couple trading newsletters. Newsletters that you trust, in order to see what they are doing, their insight etc. For example, I have followed Booking Alpha for two years, although I don't trade their alerts. I consider it valuable enough and cost effective for me to have their insight every week in my inbox. Plus, my style is somehow similar to theirs.

After some time being actively involved in the trading arena, this is some of the advice I have for people deciding to join a trading newsletter:


Cost effectiveness

If the newsletter is too expensive I will pass. How do I measure that? Simply put, if the subscription cost per year is more than 10% the value of my trading capital, I will consider that to be too expensive and won't subscribe to it.

For example, if my trading capital is $10000, the most I would be willing to pay would be $1000 to a trading newsletter per year. The reason behind that thinking is that the newsletter would have to achieve a 10% performance in the year for me to just breakeven after considering subscription costs.

10% is an achievable return. But it is a good number. So, don't think everybody can easily do it. These are a couple articles I wrote in the past about returns:
Trading with realistic expectations
How much capital do you need to trade for a living?


Reported Performance

It is crucial to not be deceived by the way they reflect performance. Are their past trades clearly stated on their website? Do they report theoretical exits? Did they trade those themselves? Are the trades verified by some third party like profit.ly or at least a prove on when they entered and exited (for example via blog posts with past dates stamped on then)?

Do they report Aggregate returns or Portfolio equity growth? Most will do the first one, which makes them look good. Don't let them deceive you. Read my article about that to know better Measuring Portfolio's Performance.

I like to see a clear track record. Where I can find the overall portfolio growth. I want to see commissions also reported, and not theoretical trades with no cost involved.

If I'm going to join a Forex advisory I want to also see portfolio growth. There's a tendency out there to reflect results in pips. "Look guys how profitable we are!!!!! +1000 pips in September!!" What the hell? 1 pip of EURUSD has a totally different value than one pip of say EURJPY. Also, winning 100 pips on a trade doesn't tell you absolutely anything as it all depends on how big the position size on the trade was. Well, sadly, and incredibly, the vast majority of services report their results this way. I like to see size of the losers in percentage terms, how much percent of the portfolio was risked and lost with each particular trade, and the same for the winners. Don't talk to me about pips! That's meaningless.

A website such as Pro-Trading-Profits can help you find whether a trading service is profitable or not.


Slippage

You have to ask your self: According to this strategy is it possible for me to actually mimic the trades of these guys without being at a disadvantage? That is without getting worse fills in my entries and exits? And this will be crucial, specially for day traders, and even more for Penny Stocks traders. Slippage is in fact the reason why I will never join a Penny Stocks newsletter. The issuer of the signal will always be front running his subscribers. He might even scalp some profits while you will inevitable have a loser, after getting a worse entry and then a worse exit. So, think about that. Also, are the instruments usually traded liquid enough? That's why I favor options specially on indexes and popular ETFs.


Trading Style

If the guys don't trade your same style you are going to have a really hard time following them. If you join, for example, a Forex newsletter that issues long term trend following alerts, where you can be in a position for 3 months and you don't have the patience don't join the service. You will end up hurting your self, cutting winners short, and messing up with every single trade based on your emotions.

Know yourself, and subscribe to a newsletter whose style and philosophy matches your personality and your free time. It is nice to be in love with the markets, but can you afford a daily trading chat for 8 hours while you are supposed to be working at the office? Then probably day trading doesn't suit you at this point in your life.


Reviews
 
Try to find out what people say about the service. Go to Investimonials.com for example. Ask your friends, or other traders you've become familiar with over time.

Always be skeptic about the reviews, this is important. Owners of trading newsletters will create fake users to leave positive reviews. Pay close attention to the language of the reviewer. Is he expecting unrealistic results? Is he just crying for one bad month? One thing that inevitably happens is that newsletters will get a bunch of good reviews during good periods and bad reviews during the bad times. So, expect bad reviews. Don't get scared by them. It is normal to have draw downs. But look at how the owner of the newsletter reacts to negative pressures. Is he polite? Those he talk to his subscribers? Does he take the time to reply to emails and communicate with them? Are people complaining about lack of transparency in the way trades or performance is reported? Accusations of lack of transparency are way more concerning than a bunch of guys crying for a bad performance the current month. Way more concerning.

How long has the service been going? Obviously you don't want to be the first victim. Wait for a few months after the service started and track the performance of the newsletter through an independent source such as http://www.pro-trading-profits.com/. And for the case of Forex, a live account funded with real money should be exposed on myfxbook.com, otherwise, restrain yourself from joining.

Learn to spot affiliate reviews. Affiliates will always try to make services look good, because they get a piece of the cake if you subscribe via their links. I wrote an article almost two years ago on How to spot paid/affiliate reviews. You may want to read it. The simple trick explained there could be useful for the rest of your life.


Communicate with them

Finally send an email to the newsletter support email address. Ask about their service, how do you make decisions? Do you trade based on fundamentals? Technical Analysis? What other sources do you follow to make trade decisions? How do you allocate money per trade? When do you decide to exit for a loss? Wait for their answer to evaluate if they are transparent. Analyze whether they sound annoyed by your questions. How long did it take to reply to your email? There is a lot to be found by just sending one simple little email. In the end it will be your money, it is worth it. Every measure you take to feel more comfortable is one more point in your favor.

I hope this helps. Don't be naive. Most of the times the money made by selling a product is much better than the one made from actual trading. So, there will never be any shortage of unscrupulous marketers and vendors out there.

Good luck folks!

Related Articles:
A website for finding out about trading services/newsletters
How to evaluate and choose a trading newsletter
Useful resources for an income trading system based on selling options
Useful resource for learning about mechanical forex trading systems


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2 comments:

  1. These are very good guidelines.

    Having tested many trading services myself, I would add a few more guidelines.

    1. How do the managers handle bad trades? Do they just exit, if so at what point? Do they hedge? Do they add to a position?

    2. How well do they comminicate their ideas and trade rational? In my experience, the best ones communicate more often than not. There are many that simply send their alerts with no additional trade rational. Personally, I have found these to leave me more uncomfortable, and generally underperforming.

    3. Do they *really* pay attention to macro-events? They all say they do, but how do they design their trades around big and known events such as the Fed unveiling QE13 or a presidential election. They don't have to be right all the time, but clearly articulating a plan of attack around these events shows more wisdom.

    And cash is a position.

    ReplyDelete
  2. Those are indeed good ideas!
    Thanks for contributing to the discussion OptionIO!

    ReplyDelete