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Commodity and Futures - Physical commodity and financial futures markets.
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Posted by truth-b-told on September 1, 2006, 7:47 am
COMMISSION ADVISORY
Beware of Websites Selling Commodity Trading Systems that Guarantee
High Profits with Minimal Risks
The United States Commodity Futures Trading Commission (CFTC), the
federal agency that regulates commodity futures and options markets in
the United States, has witnessed an increase in the number of Internet
websites fraudulently promoting commodity trading systems and advisory
services. Among other things, these websites falsely claim that
advertised performance results are based on real trading when, in fact,
the results are based on hypothetical trading. The CFTC urges you to be
skeptical when promoters of trading systems and advisory services claim
that their products and services will earn high profits with minimal
risks. You also should be forewarned that systems which trigger
frequent trading signals as part of a daytrading strategy can result in
substantial commissions and fees.
NO TRADING SYSTEM CAN GUARANTEE PROFITS
Commodity trading systems typically are computerized programs that
signal members of the public when to buy and sell commodity futures and
options contracts. Systems produce buy and sell signals based on
mathematical formulas and are typically based on technical analysis of
trading data (trading volume and prices), as opposed to fundamental
analysis (analysis of economic factors such as supply and demand).
Trading systems that are based on technical analysis attempt to predict
future price movements based on historical prices, price relationships
and price trends.
In deciding whether to purchase a particular trading system to trade
commodity futures or options, members of the public should remember
that no commodity trading system can guarantee profits. And, whether or
not a trading system is used, commodity futures and options are
typically high-risk endeavors.
HYPOTHETICAL TRADING RESULTS CAN BE UNRELIABLE
Many trading system promoters advertise their systems by reporting
hypothetical trading results. Hypothetical trading results typically
are based on trading simulations using historical price data or
simulated "real time" computer trading. To obtain these results,
trading system promoters typically pretend that they traded futures
contracts at market prices that occurred some time in the past. They
then calculate the trading results that these purported trades would
have achieved had they been placed, based on actual historical prices.
These results often show impressive trading results and large net
profits with only a few, small margin calls.
Whether based on historical data or simulated "real time" trading,
hypothetical results do not reflect the results of any actual trading.
In other words, there is no actual futures account, no actual
investment, no actual trading, and no actual profits. The results are
purely the product of simulation.
Hypothetical trading results have several inherent limitations:
20/20 Hindsight with Historical Results -- Since the trading systems
that produced the results were not actually traded under real market
conditions, the purported results fail to take into account market
circumstances that affect traders and their decision-making process,
such as anticipated news events that could have an impact on the
supply, demand or price of the commodity.
"Real-time" is not Real -- When marketing trading systems, some
promoters claim that their systems have performed successfully in
"Real-time Trading." "Real-time Trading" only means that the system has
been tested using a live data-feed, rather than being tested using
historical market data. In "Real-time Trading," however, no trades have
actually been placed in the market. Performance results based on
"Real-time Trading" are merely a form of hypothetical results, with the
same limitations.
Financial Limitations -- Hypothetical results may not adequately take
into account the ability of a trader to absorb trading losses or to
meet margin calls. Trading systems assume that the trader can withstand
all losses generated by the system and can meet resulting margin calls.
It is much easier to absorb a trading loss on paper (hypothetically)
than to do so in reality. Many traders find it unacceptable to sustain
several consecutive trading losses and/or margin calls. Moreover, in an
actual trading environment, a trader's financial condition may change
over time and affect his or her ability to continue following a trading
system.
Not Tested Under Real Market Conditions -- Hypothetical trading results
assume that futures contracts have been bought and sold at specific
prices. Since these assumptions have not been subjected to actual
market conditions, they may overestimate or underestimate the
performance of a system. In addition, some market conditions may make
it impossible to execute a trade. For instance, many systems assume
that stop-loss orders will be executed at their stop price. Under
actual market conditions a stop-loss order might be executed at a
better or worse price, or not be executed at all. Further, actual
market conditions include bid/ask spreads which might not be reflected
in the prices used in hypothetical trading. Moreover, the actual
execution of a trade could impact the price paid, especially in less
liquid or illiquid markets.
Possible "Rigging" of Results -- A member of the public should be alert
to the possibility that the system promoter manufactured results by
selecting historical trades that would have yielded the greatest
returns.
Trading and System Costs -- The profit claims of promoters may fail to
take into consideration the cost of purchasing or leasing a trading
system. While the prices of systems vary, many are sold for thousands
of dollars. In addition, most of these systems require that the user
obtain a data feed from a vendor. System promoters may also fail to
take into consideration the impact on profits of commissions and fees
charged by brokers in connection with futures and options trading. Such
commissions can have a substantial effect on profitability,
particularly when the system generates frequent trading signals. A user
should take all of these costs into account because they raise the
break-even point in trading.
Because of these limitations, CFTC Regulations require that the
presentation of hypothetical trading results be accompanied by a
specific cautionary statement warning of the inherent limitations of
these results.
FUTURES CONTRACTS ARE VOLATILE AND RISKY
Persons considering trading commodity futures or options should educate
themselves about futures and options and realize that they may lose
large sums of money. Remember: "If it sounds too good to be true, it
probably is too good to be true." The following checklist should help
consumers in deciding whether to use a trading system.
IS A FUTURES/OPTIONS TRADING SYSTEM RIGHT FOR YOU?
Do you have the financial ability to sustain trading losses and meet
margin calls? When trading futures contracts on margin, you risk losing
much more money than the initial margin amount. If the market moves
against you, you may be required to pay additional funds. The use of
margin creates potentially large exposures to loss.
Can you lose your entire investment and more without a change in your
lifestyle?
Do the trading results sound too good to be true?
Are the advertised trading results based on actual trading or
"hypothetical" trading?
Has any trader used the system in actual trading? If so, how has the
trader fared?
Will the system promoter provide you with independent verification of
the claimed trading results?
What is the total cost of the system?
Have you factored into your purchasing decision the impact of
commissions and fees that can result from frequent trading?
What are the additional costs (data feed, etc)?
Not all system promoters are required to be National Futures
Association (NFA) members or registered with the CFTC. A call to the
NFA (800-621-3570 or 800-676-4NFA) or the CFTC, or a visit to the NFA's
website at http://www.nfa.futures.org/basicnet/, can confirm the status
of a particular promoter.
Have you checked with the NFA whether the system promoter has been
disciplined by commodity regulators?
--------------------------------------------------------------------------------
Questions concerning this advisory may be addressed to the CFTC's
Office of Public Affairs at (202) 418-5080.
Commodity Futures Trading Commission
Three LaFayette Centre
1155 21st Street, N.W.
Washington, D.C. 20581
For other consumer advisories concerning possible fraudulent activity
in the commodity futures and options industry, click on Consumer
Alerts.
The CFTC's website also offers general information about trading in the
commodity futures and options markets. For example, the CFTC offers
brochures on-line, such as "Futures and Options What You Should Know
Before You Trade" and "Glossary: The Language of the Futures Industry."
To obtain this and other information, go to the CFTC site map.
The Federal Trade Commission's Advisory - Day Trading Ads: Cutting
Through the "Bull "
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