LST: Diversification increases profits whilst at the same time reducing risk. Therefore it is advantageous to trade as many markets as possible (within reason). We have found that the optimum number of markets to follow is around 40-44. It would be ideal if everyone could trade all 43 markets that we currently trade but this is not possible for those starting with a smaller account balance.
For this reason we did some testing to find out what the best approach is for smaller account sizes and the results of this research is listed in the member's area on the LS Trader. Essentially it is important that smaller accounts can get exposure to each of the different market sectors that we trade but at the same time not take too many trades that are highly correlated.
For example, if you only have a small account and only open four trades and these were Gold, Silver, US Dollar Index and the Euro/US dollar you would effectively be taking 4 times the risk as all of these markets are highly correlated and a move in one of these markets is likely to be mirrored in the other markets.
At the same time, some markets are much more volatile than others and some can move several hundred points per day. It is common sense that if you have a small account you will want to avoid the highly volatile markets and stick with the quieter, less volatile markets.
As far as risk per trade is concerned we find that 2% risk per trade is about the right amount to risk as it leads to good profits but at the same time is not too risky. Some may prefer to go for lower returns and only risk 1% per trade but we like 2%.
If you have a small account which is say £2000 then 2% of that is only £40. It's not really possible to trade any markets with £40 risk per trade so it becomes necessary for the smaller accounts to take a higher risk per trade, up to 5% risk per trade. Obviously increasing the risk per trade increases risk so this has to be offset but trading fewer markets and ensuring that those that are taken are not too highly correlated.
Therefore account size, risk per trade, how many markets to be traded, volatility of each market traded and which markets to be traded are all interrelated, as is each individual's appetite for risk. This is all included in our guide to portfolio selection which aims at helping subscribers select a portfolio of markets to trade which is suitable for them.
FSB: Are there any other expenses needed to trade the system?
LST: Apart from our monthly subscription fees there are no other expenses required to trade the system. Opening an account with a spread betting firm is free and you do not need any charting packages or any software. The only software you do need we provide as part of the subscription fee.
FSB: Do you trade the system signals in your live account?
LST: Yes. We trade the exact same signals on numerous accounts for ourselves.
FSB: How consistent is the system? What profits can I expect to earn?
LST: The markets trend approximately 40% of the time and as this is a trend following system we obviously make profits around 40% of the time. The way it works is that we make more in the winning periods than we lose in the losing periods. This is done by correct money management and trading when the odds are slightly in our favor.
In the short term results are affected by market volatility but over a period the performance is consistent. In back testing the system produces an average annual return of 165%. Over the past 3 years we have had actual profits (verified by subscribers) in excess of 100% per year.
FSB: How was the system tested? You state that you have tested the system over 25 years of data. Tell us more about how the system was tested...
LST: We have a large database of markets which goes back to early 1982. The system has been coded so that each of the rules of the system can be incorporated in to a program and this program can then be run to see how the system would have performed over the period of the test.
Many systems are developed in hindsight and are curve fitted i.e. the results are built around a market and are optimized on the past. Curve fitted systems have little or no predictive value as they are built with hindsight. In real trading we do not have the benefit of hindsight so we have to avoid curve fitting at all costs when we develop and test a trading system.
To ensure that we are not curve fitting our system we run the system over various markets over a period of data, say 25 years for example. Then we change the start date of the test so that we are testing 20 years for example. Then in the same way we change the end date so that the test ends in say 2002.
In addition to this we run the test over more and fewer markets. We add markets to the test and then we take some away. Then we test over some different markets. Doing this ensures that our testing procedure and our system is robust and that we can expect similar performance in the future as what we have seen in the back test.
Once we have done all these tests we look at all the different results and although we will obviously see different results, we should see similar overall performance. If we see drastic changes in performance then something is wrong and the system has been curve fitted.
This is how the LS Trader system was developed and why we are confident that the future performance will be similar over a period of time as the back tested results have been. Obviously we have now been trading the system ourselves for several years as have our subscribers, and the results are similar to the back tested results.
FSB: If the system is that good, why is it for sale?
LST: The system is not for sale and it never will be. There is a big difference between selling a system and letting people have access to the signals that the system produces. In my opinion, if a system is sold, i.e. the workings of a system and the specific trading rules then the system is of little or no value. We have seen before that when too many people start using the exact same indicators that those indicators lose their reliability.
We value the system very highly and this is why we will never sell it. Allowing people access to the signals that the system generates does not in any way devalue the system. If it did then we would stop new people from accessing the system. Doing it the way we do, we remain in control of the system at all times.
Allowing people access to the signals is really another way of optimizing our own business. That is why professional traders don't just trade their own accounts but manage money for other people and charge them a fee for doing so.
FSB: What are the risks?
LST: There are always risks in trading and there are never any guarantees of future performance. That said, the system has very robust money management rules included and the risk of losing all your capital is low. If you trade with a 2% risk per trade then you need 50 losing trades to take you out of the game. The chances of that happening are extremely low.
Trading is a long term game as the system has an edge in the way that it trades. That means that over a period of time the system has a positive expectation but to be in a position to take advantage of the positive expectation you need to be able to follow the system for a while.
For example, if you play roulette in a casino you know that the odds favor the casino. There are 36 numbers but they pay 35 to 1. There is also zero, which takes away half of your stake. If you bet for a million spins in the casino you will infallibly lose regardless of whatever you do as the house has a statistical edge.
Conversely, our system has a statistical edge and if followed over enough trades the odds are heavily stacked that you will come out in front. Therefore it is necessary to get in to what we call “the long run” where you give the system enough time to work for you.
That is why the system has been built with money management and risk control measures included to enable the system to be used over a period of time without losing too much trading capital and enabling users to get in to 'the long run'.
FSB: How are the signals delivered?
LST: Each week we post a weekly trades sheet up in the member's area. This lists all of the new trades that we will be making for the coming week as well as the trades that we are in from previous weeks. It also shows the stop losses for each of the trades, both new and those that we are currently in. Members are notified by email when the trades have been posted in the member's area and this happens on a Sunday afternoon/evening well in advance of the markets opening on Monday. All members have to do is log in with their user name and password and everything is there ready for them.
FSB: Is every trade covered by a stop loss order? How do you control risk, suppose you adjust the stop loss orders on your trades how do you communicate it to your members?
LST: Every trade has a stop loss added to it when we open trades. As this is a weekly system we adjust stops once per week. These changes are sent out to members once per week via email and are also available in the member's area of our website should they not receive the email for any reason.
FSB: Tell us of some of the highlights so far in the period you have been trading the system.
LST: Well, obviously 2008 was the highlight for us as we produced a return of 1504.1%! This figure was actually based on the exact signals that were sent out to the members each week and many subscribers achieved similar results. Obviously there will be slight differences for results achieved by each subscriber due to the time that each trade is opened and the actual price that the trade is filled at.
Obviously 2008 was an exceptional year and 1504% is not what we can expect to achieve each year but it does go to show what is possible. There were many great trends in 2008 both for long (buying to go up) and short trades(selling to go down). Because we trade both long and short we can make money in any market conditions or economic climate.
FSB: Tell us about your 60 day money back guarantee? How does the guarantee work in practice? Do you actually need to follow the system for some time to be eligible for the money-back guarantee?
LST: We don't place any restrictions on the guarantee save for asking people that they must cancel and request a refund within the 60 day period. If they do this their subscription will be cancelled and up to their first 2 month's subscription fees refunded, no questions asked. We don't want any subscribers who are not delighted with our system and have never refused a refund when someone has asked for it within the specified time.
In our opinion forcing people to place all the trades or placing restrictions on how people can claim a refund is the same as not offering a refund policy in the first place. There are some systems that make you follow their services for a whole year and place all the trades for a year before you qualify for a refund! Who would follow all the signals for a year if they were not happy just to get a refund? We think those sorts of guarantees are ridiculous and unfair to the subscriber. We want our subscribers to be happy and treat them in the same way that we would like to be treated ourselves.
FSB: Any departing words for our readers?
LST: The biggest risk in life is to sit on the sidelines and not take action. To move ahead from where you are you have to be willing to try new things. We are very confident in our system and that is why we offer a no questions asked 60 day money back guarantee and put our own names on the system. Try the system out. If you are not sure just paper trade it for 2 months and if you don't like it simply cancel and ask for a refund and you have lost nothing. But if it is as good as we say it is then you have gained a new tax free income stream.
LS Trader is a financial spread betting system which historical backtest apparently puts average performance at 150% a year and so far it appears that the two years of live performance have been in line with how the spread betting system should perform historically. For more information about this service and why we chose to endorse it check out this link and follow our ongoing review.
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