Money Every Week

Recently a collective2 user that goes both by the name HappyTrading and ForexStar2 went on the forums and made some statements that concern me. I want HappyTrading/ForexStar2 to do well. I honestly hope they are right that they are right and do fantastic. However, I think this strategy is likely to fail if it does not change its methodology soon.

1. Overly Confident

Investors need to think and speak in probabilities. If they don’t, then they are likely overlooking real risks. For example, they posted that no single trade would lose more than 3% due to a 3% stop loss on each trade. Of course, just days later a single trade had a drawdown of 12% in a matter of 5 minutes! I don’t know if this was due to difficulty getting filled, a technical error, or any number of reasons. The point is that being overly confident often means risks are being overlook, typically due to ignorance and occasionally due to negligence.

2. Too Much Leverage!

The strategy has an average leverage use of 38! That is huge! The vast majority of strategies that survive 3 years or longer use less than 5. Leverage can be very helpful in amplifying returns, but too much of a good thing can be deadly. Of the strategies that are 3 years or older and have a positive return on the Old-Timers board, the average leverage use is 3.1 and the maximum daily leverage is 19! In other words, this particular strategy likely has far too much leverage to last for a long time.

3. Too Active!

This strategy is a day trading strategy. Why is that a problem? Day trading is extremely difficult to do successfully and even harder to do on C2 successfully with AutoTraders following. This strategy has had a 202 trades in a period of just 12 days. That is an average of about 16 trades per day. For reference, of the strategies that are three years or older on C2 and appear on the Old-Timers leader board the average trades per day is 0.5!

Of the strategies that are 3 years or older and have a positive return on the Old-Timers board, the average trades per day is just 0.5 and the maximum is just 3.5! Again this doesn’t mean this strategy is doomed, but it definitely is exhibiting some worrying behaviors.

Summary

Strategies that are run by managers with this much confidence, leverage, and activity often end up losing big! So be cautious. They could be right, but there is a graveyard of similar strategies that have come and gone. As of today the strategy looks like the below screenshot. I predict that it will do much worse or be discontinued before long if the manager does not change methodologies. To be clear though, it may see astounding success first. So far it hasn’t. I encourage subscribers to follow strategies that don’t exhibit these types of red flags.

I wish this person all the best, but we certainly disagree on investment methods.