Saturday, March 30, 2013

Why I don't offer a signal service

NOTE: This post originally appeared in March 2013, but has been updated in February 2015.

From time to time I get asked why I do not offer a subscription based service giving out signals based on my system.

On the face of it, this would be very easy for me to do, with very little additional work involved, and would provide me with a risk-free additional income stream. So why not do it? Well, there are a number of reasons for this.

Firstly, I'm often reminded of the following proverb:

"Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime".

I also think of Ed Seykota's story about the Jade Master and his apprentice. In my experience, those who subscribe to signal services want the results without understanding the process. Quite often they go from one service to another when they encounter a string of losses (which can occur with any profitable system), while searching for a holy grail, which simply doesn't exist.

These days the only people who have access to my own trades are those who are in the mentoring programme. They have demonstrated that they are committed to learning and fully understanding how to utilise a trend following strategy, and while they are in the programme, they are able to pick my brains and ask me why I do certain things and not others.

We use scans to filter out of lot of stocks, but that is only the starting point. There are certain 'visual characteristics' that I look for, which cannot be programmed into a code (at least, I can't code them!) but are relatively easy to understand.

Then there are other factors that may prevent me from taking an entry signal - for example, is an earnings release imminent?  What is my current level of market exposure?

Now, if they want to follow me into the trades I take, then so be it. But my positions are posted up primarily as an educational tool, so that they can then go look at the chart of that particular stock and understand why I've selected it, and then cross refer it to the method we use.

Within the group environment we can discuss other set ups, as well as going through the risk and psychological issues surrounding trading and trend following in particular.

What tends to happen after a while is that those traders are able to start identifying those setups independently of what I am looking at - this proves that the skills I learned and use every day are transferable. Then it is a question of having the discipline to use good risk management and being able to develop the mindset to follow the rules employed.

In my own opinion, blindly following someone's signals is a bit of a cop out, especially if you do not have full access to the reasons behind each entry signal. More importantly, not many signal providers tell you when they get out of a trade - be it a winning or a losing one. Do you understand their exit rules, or are they left to your discretion? This gives you an opportunity to blame someone else if a trade goes wrong and you lose money. Does that help you develop as a trader?

The second reason for not providing a signal service is quite simple - I enjoy trying to help others. Churning out trading signals is faceless, whereas being able to strike up a relationship with these traders, and to help them achieve their goals is far more rewarding.

Thirdly, when using a trend following approach signals can come along intermittently. In theory you can go days without having a entry signal trigger. It's a bit difficult to offer a service when potentially you will have nothing to follow!

Finally, by working with a traders over a period of time I am also able to learn and improve from them - both in terms of my own trading skills as well as my communication skills. The feedback I get tells me what areas need clarification or better understanding, and enables me to help other traders better in the future.

In time, traders should become self sufficient, safe in the knowledge that they fully understand how to trade profitably using a trend following method, while having back up support as they develop their skills. They can then swim off on their own, knowing how to make money. The goal therefore is to teach a man to trade, to feed him for a lifetime.

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