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How About the Automated Trading Systems on Infomercials?

| | Posted in: Technical Trading

A reader asked: “I’ve always wondered about these computer stock trading programs you see on infomercials, such as this one (there are many others). They seem to promise ‘easy’ profits–all you have to do is buy when the program tells you to buy, and sell when it tells you to sell. Of course, if it was that simple, we’d all be rich. But how effective are they?”

The promoters of automated trading systems generally do not provide enough information to tell whether the systems enhance profitability compared to manual trading (or no trading). The examples they offer of applying the systems to specific trading strategies have strong results, but it is prudent to suspect that offerors have cherry-picked results for promotional value.

Take a look at “Collective2, a Marketplace of Trading Systems” for some analysis of returns for a fairly large set of arguably representative automated stock trading strategies. It seems reasonable to infer from this analysis that many people “renting” automated trading strategies do not do very well and that they may underperform the broad stock market as a group.

It is also reasonable to question why someone would go to the trouble of commercializing, maintaining, administering and marketing a system when they could (according to their promotional material) get rich more easily just by using it themselves.

CoolTrade CEO/Founder Ed Barsano commented:

“While reading one of your blogs, it was apparent that the writer had NEVER experienced true fully robotic stock trading, and because of his (or her) lack of experience, she assumes that it is simply not real.

“First, Robotic trading is not a gimick [sic] or get rich quick scheme. Also, in the case of the CoolTrade software; the reason the CoolTrade software is so great, is BECAUSE I released it to the public. As a retired Microsoft software developer, I created the CoolTrade robotic trader, but it was the subscribers feedback, questions and answers, and free training classes that I offer, that educated me, and allowed me to create a really great system. If I had just used the system myself for the last 10 years, it would not be a fraction of what it is today.”

The original response above does not assume that fully robotic stock trading is not “real” (does not work). To reiterate, the response states:

Investors considering automated trading systems should be skeptical that offerors’ promotional examples of extraordinary profitability are representative of results for all users.

Evidence from the performance of an arguably representative sample of automated stock trading systems (at Collective2) does not support a belief that automation ensures profitability or market outperformance.

Investors should also be skeptical that offerors of trading platforms and systems reasonably account for biases (e.g., look-ahead bias) and trading frictions in generating and calculating cumulative returns for example trades.

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