1. Many technicians have observed that uptrend is generally longer in duration than a downtrend a typical uptrend seems to last about twice as long as a typical downtrend. The most significant reason for the persistence of uptrend is that we have been doing the majority of trading in an inflationary environment. Thanks to Federal Reserve monetary policies that presume that any inflation is bad in spite of the Fed.’s best efforts. There will always be irregular periods of waning prices.

2. An uptrend is generally less unstable than downtrends. For example: Many years ago there were times when the onion market prices actually appeared to be going to zero. The price was so cheap that brokers could take delivery of the onions only to throw them away and sell the empty bags at a much higher profit. The long side profits appear to have unlimited potential. Rising prices serve to increase demand and facilitate the existing uptrend while the short side profits are limited.

3. An uptrend always tends to end in spikes while downtrends end in flat areas. There is no limit to how far prices can be raised. As the market reaches the bottom there are rarely huge positions remaining to be liquidated. Traders are attracted to bull markets and the liquidity increases as the prices rise. While the down side prices make the traders look for rising markets.

It is to be carefully noted that all the above points are only general observations relating to non-financial futures markets. Securities or financial markets are not looped in this category.

Having understood and analyzed the basic difference between rising and falling markets we need to improve the design of our trading systems. Here are a few of the accommodations that purchasers may have observed-

1. 1. Few of our systems are designed only from the long side as we are using a multiple systems approach. Every system need not trade in both the directions. The long side is usually easier and more profitable. As long as our long system trade is out of trouble, we can wait for the uptrend to develop.
2. 2. More long-side entries are made when designing a system that trades in both directions which results in more long trades than shorts. We are intentionally building in a long side bias.
3. 3. Profits are often let out unknowingly when exit strategies in a system are designed. Short side profits are expected to be limited. On the long side we prefer to try and let the profits run.
4. 4. It is absolutely meaningless when price levels do not make sense to go short. For example; sugar has traded as high as 63 cents per pound and as low as about 1.5 cents per pound. The risk is obviously much greater than the potential reward.

There are fundamental considerations like supply and demand that influence the trading characteristics. These fundamental issues shall be discussed in yet another bulletin.

Our learning from the article; it is always assumed that there is a good case for the long side of markets than the short side. Entries and exits do not have to be regular. Traders disagree on which side is best because the characteristics of long and short trades are different.

Backtesting is just the procedure of using chronological records to experiment the act of some trading approach. Data Mining involves probing through data in order to establish patterns and find probable correlations between variables.

The Multiple Hypothesis Problem

Let’s presume that we backtest the approach against ten years of chronological marketplace data. The results are not very encouraging. Conversely, being violent and stumble traders as we are, we decide not to give up so easily. What about a ten day moving average? That might work out a little better, so let’s backtest it! We run another backtest and we find that the results still aren’t stellar, but they’re a bit better than the 20-day results. We decide to explore a little and run similar tests with 5-day and 30-day moving averages. Finally it occurs to us that we could actually just test every single moving average up to some point and see how they all perform. So we test the 2-day, 3-day, 4-day, and so on, all the way up to the 50-day moving average.

Now certainly some of these averages will perform poorly and others will perform fairly well, but there will have to be one of them which are the absolute best. For instance we may find that the 32-day moving average turned out to be the best performer during this particular ten year period. Does this mean that there is something special about the 32-day average and that we should be confident that it will perform well in the future? Unfortunately many traders assume this to be the case, and they just stop their analysis at this point, thinking that they’ve discovered something profound. They have fallen into the “Multiple Hypothesis Problem” pitfall.

Overfitting

Overfitting is a category of setback of the above problem. In overfitting we first look at the past and then build a single complex hypothesis that fits well with what happened.

Not likely, but we could always keep altering the model and taxing the approach in diverse samples (out of sample testing again) to see if our performance improves. When we stop getting performance improvements and the only thing that’s rising is the complexity of our model, then we know we’ve crossed the line into overfitting.

Conclusion

Data mining is a method to use our chronological price data to propose a feasible trading strategy, but that we have to be aware of the pitfalls of the multiple hypothesis problems and overfitting. The way to make sure that we don’t fall prey to these pitfalls is to backtest our strategy using a different dataset than the one we used during our data mining exploration. We commonly refer to this as “out of sample testing”.

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The key to a proper trading strategy drills down to the foundation of that strategy. To have the proper foundation, a solid understanding of how markets work and why price moves as it does is to be understood. Trading system should not have any flaw in thought process the existence of which lead to poor trading results. If we want a consistently profitable trading system, we had better make sure that the person on the other side of our trades is a consistent losing trader. Our system had better be an expert at finding a novice trader or we are in trouble. We don’t need to know the exact person on the other side of our trade, we just need to know if they are a consistently profitable trader or a consistent losing trader, and the chart will give us most of this information.

A proper trading system need to have reality based logical rules.

Failure à Success
In reality, a proper trading system means a simple transfer of accounts from those who do not realize market logic to the accounts of those understand the market logic. Trading systems just accelerate the process.

Most traders who develop trading systems don’t take this approach or think in the simple terms. Most traders do not begin their knowledge path by managing institutional order flow. The huge majority of traders will begin with a trading book or tutorial developed by a writer or speaker. It sure will NOT be from a real market speculator. Unlike real trading system, books are filled with conventional use of indicators and chart patterns that may not work. If so, the author would certainly not be selling the book to you. Instead he may be a leading trade broker in the market now. When designing your trading system, make sure you bring your foundation back to the basics of how and why price moves in any and all markets.

Everybody, it seems, has an investment trading system these days. Systems that involve laying a spiral graph toy over a price chart. Systems touted by a man in a cowboy hat, selling “the world’s most powerful money manual”. Systems that claim to use artificial intelligence or neural nets. There are even companies that claim that they develop 25 trading systems every month and test every one against “The 10 Power Principles for Successful Trading Systems” (that they invented in just the last couple of months).

There’s even a guy out there who claims that “Since 1994″ he has “taught thousands of e-mini traders worldwide a simple, reliable e-mini trading methodology.” It’s hard to understand how he could have been teaching people about the e-mini since 1994, since the S&P500 e-mini contract, the first e-mini, has only been in existence since 1997. Further, he claims, “it’s much less expensive than most other e-mini courses and systems available today!” FYI, his program costs $1,800(!). Our research found very few investment trading systems that cost more than this one. When we contacted him about these two seemingly unsupportable claims, we never got a reply.

There’s so much baloney in the trading system marketplace it makes you want to follow Mark Twain’s advice about how to double your money: “fold it over once and put it back in your pocket.” Caveat emptor.

I’ve been on the Internet a long, long time (in Internet years) and I’ve seen a lot of “get rich quick” investment trading systems. When looking to purchase a trading system, it can be difficult to find a trustworthy business.

Some scams can be spotted by common sense. For example, a guarantee of 2,500% yearly is clearly outrageous as it promises that with only $5,000 you could make $125,000 in one year… and then through compounding for five years, $48,828,125,000! If this were true, wouldn’t the creator trade his or her way to become a billionaire? I admit, I’ve bought several of these trading systems, and I never made even 10% of what they promised. Maybe you’ve already been scammed by one of these fraudsters. Anyway, I finally got sick of what was being offered.

But these bogus programs persist because who wouldn’t love to make piles of money quickly by following a trading program, working from home, and only doing a few hours of work per week. I’ve spent the past two years trying to find trading systems that actually seem to work. Only over the course of the past few months have I found any trading systems worth buying.

I’ve been taken to the cleaners enough times that I finally decided to take a hard look through the all of the investment trading systems I could find and see if there were any that were actually legitimate. Too many of them met one or more of the “scam criteria” listed below.

To sum up my research, almost all of the investment trading systems I found were completely worthless.

Amazingly, while evaluating the claims of all these systems, I actually did find a few legitimate systems.

But new scams pop up all the time. How do you separate the few legitimate investment trading systems from the scamsters? I’ve provided some information about the few legitimate trading systems I’ve come across at the end of this article, but first, please take a look at my “Top 12″ most common ways to spot trading system scams, listed below.

Scam #1: Too many rules – too hard to understand

It may surprise you, but the best trading systems have fewer than 10 rules. The more rules there are, the more likely the trading system was “curve-fitted” to past results. Such curve fitting rarely produces profits in real markets.

Look for trading systems that is easy to understand and execute. Investment markets sometimes move quickly, giving you little time to employ complicated formulas when making a trading decision.

Scam #2: Trading only through private markets or “specially designated brokers”

If you can only buy and/or sell through certain channels, you may find yourself unable to sell your investment at the price you want. Also, the private markets and brokers usually take a very large commission because you have no other means of liquidating your investment.

Trade electronic markets whenever possible because (1) commissions are lower and (2) your orders are filled very quickly. When trading electronic markets you receive your fills in less than one second and can immediately place your exit orders. By trading liquid markets you can avoid slippage, which will save you hundreds or even thousands of dollars.

Scam #3: Too much time spent hyping the reward and too little time spent on how much risk is involved

Let’s look at an example: If you go to Las Vegas, to the roulette table, and bet everything you have on “red”, then you have a 49% chance of doubling your money and a 51% chance of losing everything. The same applies to trading: You can make a lot of money if you are risking a lot, but the “risk of ruin” is also very high. You want to find a balance between risk and reward that you are comfortable with.

One rule of thumb is that the “risk of ruin” should be less than 5%, and the chance of success should be 5-10 times higher, e.g. if your risk of ruin is 4%, then your chance of success should be 40% or higher.

Scam #4: Too large an initial investment required

There is a futures day-trading system out there that requires you to invest over $25,000 just to get started!

A good trading system should allow you to start small and grow your capital. A good trading system allows you to start with one or two contracts, and then increase your position as your trading account grows. This is in contrast to many trading systems that require increasing position sizes when you are in a losing streak.

Many “trading systems” are little more than a variation of the so-called Martingale Strategy, which works like this: every time you lose, double your contracts, and one winner will win back all the money you previously lost. What if you have four or five losing trades in a row? After four losses, you would have to trade 16 contracts! Trading the S&P 500 E-Mini futures contract, you would need at least $63,200 just to meet the margin requirement for such a trade. That’s why Martingale Systems don’t work.

Scam #5: Complicated, subjective trading decision-making

Emotions and human errors are the most common mistakes that traders make. By all means you have to avoid these mistakes. Especially during fast markets, it is crucial that you determine the entry and exit points fast and accurately; otherwise, you might miss a trade or find yourself in a losing position.

Therefore you should look for a system that takes the subjective, emotional aspect out of trading. Buy and sell decisions are mechanical, with no subjective interpretation necessary.

Scam #6: Too low a percentage of winning trades (I call this the “we lose money on every car we sell, but we make it up on volume” pitch – nonsense)

Your trading strategy should produce more than 50% winners. That’s not to say that trading systems with smaller winning percentages can’t be profitable, too, but the psychological pressure is enormous. Losing on seven trades out of 10 and continuing to follow the system takes great discipline, and most traders can’t stand the pressure. Often, they will start “improving” the system, or stop using it altogether.

Especially for beginners it is a big help to gain confidence in the system if there is a winning percentage of 65% or more.

Scam #7: Systems that have only been backtested, never actually traded in the market

The Commodities Futures Trading Commission specifically warn about the riskiness of “hypothetical” trading systems that only show results based on “backtesting”. A big problem with backtesting is that anyone can find a set of data that their system works on. Remember, hindsight is 20/20.

Look for trading systems that show actual results, either through tables showing actual trades or trading records, or both. Yes, these results, too, can be faked, but it will be harder for the system sellers to wiggle out of a success claim if they’re willing to show you actual results.

Scam #8: Same bulls**t, new wrapper

If you’ve been looking at trading systems for very long, you may start noticing that the new scams that keep appearing are really just the same old scams, over and over, with new window dressing. They may vary in form and content, but they all share one predominant trait: they just don’t work in the market. Eventually the sellers fold up their tents and disappear into the night. With your money.

Scam #9: The trading contest winner

The winner of these trading contests, even the legitimate ones, may be a brilliant trader, but could just as easily have manipulated the results in his or her favor by opening several accounts, then trading them against each other in order to create one enormously successful account. The way this works is like this: on day one, the contestant might have half of his accounts long with maximum leverage and half short with maximum leverage. If the market rises, he closes the short accounts the next day, and reverses position on half of the long accounts, i.e., taking them short. He or she keeps repeating this process until one account has been right every day of the contest. This isn’t cheap, but the payoff at the end can be worth it, in spades: even if the contest prize is small potatoes, winning the contest practically ensures a book deal, seminar audiences, and thousands of aspiring traders willing to pay for meaningless gibberish disguised as market expertise.

Scam #10: Secrets of The Big Names

Sometimes this takes the form of the “Warren Buffett method” or the “Peter Lynch method” of investing (usually written by people who have never worked for or with Mr. Buffett or Mr. Lynch). They just use his name and claim that they are writing about a style of investing that Buffett or Lynch made famous. The same goes for other celebrity investors such as George Soros. The other, more common scam, refers to some unnamed group just referred to as The Insiders, like the proverbial “Them”, as in “They say…” This is almost always a sign that nonsense is being peddled.

Scam #11: The “little known, never before revealed system the pros use”

One popular website sells a very costly manual on a technique they claim has “never before been revealed to the public.” If you read their marketing hype, you’d think that they regularly rubbed shoulders with the biggest movers and shakers in the market. What they don’t bother to mention is the name of one single real person who uses this “powerful, foolproof system for generating consistently high profits in the seven figures annually.”

Let’s face it: if there even was such a thing as a “never before revealed secret system the pros use”, why is it being revealed now, to you, by this seller?

Scam #12: The trading system works in any and all markets, for day trading, swing trading, position trading longer term, etc., etc., etc.

Who wouldn’t love to have a trading system that works in every market? But seriously, who is gullible enough to think that such a thing could possibly exist? That’s like saying you have a vehicle that drives on the road, swims like a fish, and flies like a bird.

Do you think that if you know how to drive a car you can fly a plane? Of course not. In my experience, any system that says it works in every market probably won’t work in any market.

Well, my search for legitimate Investment Trading Systems has come to an end. While I have to say I was thoroughly disappointed with most of what I found, I did discover three programs that did deliver on their promises; I’ve listed them below, and I recommend that you take a look at them for yourself. Whatever you decide to do, I wish you the best of trading success.

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