Subscription Bases Trading Sites

Twitter and social media are obviously changing the way financial markets operate. Information is faster and easier to access then ever before. Unfortunately, trading talent, is still difficult and rare (even in the biz fyi) Stocktwits in particular is a new medium for retail and otherwise unknown talent to showcase their trading ideas to the general public. In an effort to monetize that skill, many have started subscription or premium based services to share trading ideas. I wrote about one such site which has become quite a popular post on this blog. Some random thoughts on this trend and a few humble suggestions for anyone considering paying money for one:

1) First and foremost in my head, if an individual is such a talented trader, why feel the need to sell a subscription service? As I write this, I already have a general idea of the answer; trading ideas is low cost, highly scalable, and it pays. At $50/month, 100 subscribers comes out to $5k month. Not bad residual income. If retail is trading a 500k account and making 50% returns, simple math = $250k/year with an additional $60k in subscription or about 1/4th of the annual take. Now, that annual take is an estimate, as we all know, trading revenue can and is highly volatile so having some steady income is a huge psychological cushion. But back to the original point, I want to know why the guy is selling a subscription and I want to know that he is positive in his account. Even if it’s for the sake of peace of mind, I am highly skeptical at first of anyone selling trading ideas. I don’t even like sell-side ideas 🙂

2) It’s unlikely that you take ALL the same trades as your service provider. This is critical! The provider might be highly profitable but if you pick and chose the trades you take, it is highly unlikely that you match his returns. In all likely hood your returns will be worse. Take this situation: you  monitor a new service, see a couple profitable trades in a row, you take the next trade and are stopped out, next trade and your a little gun shy and you miss it, only to take the next one that is stopped out. Something along those lines. When analyzing a systematic trading strategy, we would backtest a strategy both with unlimited capital and one with capital restraints. The capital restrained account obviously could not take ALL trading signals at times because it would run out of money. Otherwise we would also try to randomize signals on any given day in the backtest, all in an effort to see if the GENERAL signal was profitable and it was not based on some type of anomaly. Hopefully this makes sense?  In my opinion the metric YOU should be most interested in is his/her Percent Profitability. So if we take the signals randomly, we should still make money in the long run.

3) Depending on your skill level, one might be interested in trading education versus trading signals. If you are new, you are likely looking to develop a style or strategy that fits you so therefore the above paragraph on hit rate is especially important. Similarly if you have a strategy and are simply looking for someone that trades a similar style for new ideas, then the above may not be as relevant. And in all cases, the provider should place capital preservation and risk management at the top, the last thing you need is some open ended risk that can blow up your account.

4) Be mindful that you’re going to hear/see/read more about winning trades then losing trades on twitter. Everyone does it. I do it and I’m not even selling anything. A winning trade is just more fun to talk about. Just be mindful of the hit rate paragraph when you see someone boasting how many great trades they had in their chat-room, newsletter, etc. I’ll say it again, your probably not going to match that performance.

In conclusion I think a trading subscription CAN be of good service if you know what your looking for and have properly vetted the provider. But keep in mind it is NOT the answer to trading but simply another tool, like tradestation or excel.

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~ by largecaptrader on May 15, 2011.

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