Usually this is in the forex world and takes the form of a signals system that you buy on a subscription basis or one-off lifetime membership basis and it gives you buy or sell signals i.e. trade signals for the direction of a particular market say a currency pair. The thing with these forex trading systems is that a lot of the money goes into marketing the trading system. It is not really developed with any thought other than how can it be marketed in the best possible manner. As such system sellers try to make them look as good as possible on paper. What are the things to watch out for?
1) Unrealistic Returns – it is very easy to make something look better than it is like for instance using hypothetical returns instead of real past returns.
2) Secret System – there is no magic money making system. Most of these people will tell you its secret and that they can’t reveal the system algorithms.
3) No detail of risk – if you don’t know what the system is based on you can’t manage the risk. What is the system was based on some kind of martingale algorithm which would work most of the times until it blows out? A good system has to pay full attention to the risk. If there is a drawdown in the system how does it manage it?
4) Selected system metrics used – X per cent win rate. We have got 5 trades that made X. They cherry-pick returns and don’t give you sufficient detail.
hypothetical returns, black box versus grey box