| Behind the Growth in "Expert" Advisors - Part One |
by John Jagerson Stock and Options brokers as well as forex dealers that cater to the active investor crowd have a problem looking for a solution. The issue is that most individual active traders don't make money in the long term and a surprisingly large percentage of them lose their entire account balance within a year or two of trading. A potential solution is emerging but it also has some big issues. 
- You can see the second article in this series by clicking here. Most industry professionals blame the lack of a money management strategy on the short life span of individual short term traders. New traders are getting into trades too heavy and driving up costs with erratic bursts of rapid fire short term trades. This trading inconsistency means that a new account may not last a year. Learn more about money management here. Traders on the other hand struggle to find the "best" strategy to make money in the markets. They often perceive short term trading and lots of leverage as the way to get where they want but have difficulty developing or following a methodology that can deliver profitable results. Expert advisers or auto-trading has stepped in to fill both gaps. A retail trader can select a system or adviser with a "track record" to follow and the trades that the adviser takes will be mirrored in the individual trader's actual account. Usually the adviser includes money management with their service that can adapt to the trader's account balance. This seems to solve both problems at once. Brokers and dealers now have accounts that lose money slower and trade more often and traders can rely on an "expert" to execute trades within their accounts without all the work. In part two of this series we will talk about the problems with expert advisers. This kind of service has existed in the market in the past but new technology and more uniform trading platforms (especially in the spot forex market) has made it possible for the industry to grow like never before. Based on a survey we did among forex dealers up to 60% of a dealer's order flow was coming through expert advisers. The number is much lower in the stock and options broker business but it is growing significantly. Before you decide that the benefits of an expert adviser (including advertised returns) are attractive to you check out part two in this series. We will discuss the effects of survivorship bias, runaway costs and the risks of opaque trading strategies. The bottom line is that these services have potential but the industry is currently overrun by scams and bad advisers. Learn what to look for before signing up for one of these services. Next: Why most stocks are like Ponzi schemes
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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
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