Let’s imagine that you come across a system that made $5,000 in one year
In this hypothetical scenario, a $5,000 profit represents a 30% return after commissions and fees. Let’s suppose you think this is a decent return. After all, a profit is a profit. You imagine yourself having subscribed to this particular system and how pleased you might have been to be 5K wealthier in a year.
Sometimes outcomes are easy, if you didn’t have to experience the actual journey
So let’s imagine you actually went through with this subscription last year. What if the system had sustained losses in every month except for September and October, where it had made tremendous gains? At the end of the year, the combined profits and losses (after commissions and fees) produced a gain of $5,000? Would you have been able to stomach the losses from January to August? Most people would not. But this brings up another important question: was the system developed to perform like this; were the two months of profits pure luck; or was there an over-exposure to risk through unusually large position sizes (plus luck)?
Distribution of profits and losses tell you a lot about the performance of the system
A statement of cumulative profits or losses can’t tell you anything about the behavior of a system. It doesn’t give you much to be skeptical about. In highly-leveraged speculative markets, skepticism is crucial.
Sadly, many people approach the futures markets with cognitive biases preventing them from considering information contrary to what they want to hear. It’s a matter of both greed and fear. Greed focused on the possibility of making high profits, and fear that such a belief will get debunked.
It’s best to do some hard research before you speculate in a risky and highly-leveraged market.
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