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Oct 18, 2017 8:20:00 PM

Backtesting |

Forex Managed Account Services | Understanding Real Versus Hypothetical Result

Steady returns, low drawdowns and full transparency are three key factors that set the best-managed forex accounts apart relative to their competitors.

Nothing is more exciting than projecting your portfolio returns based on the historical results you see published from various Forex trading systems.

But along with the higher returns of Forex managed account services, you also have some new concepts to take into account to identify how real the returns are.

Same contributions, same age, but different retirement outcomes

For example, you will often see the TV commercials promoting industry super funds. You will see two people in identical circumstances.

Same income, same contributions and the same percentage return over 25 years or so.

But the result is always different.

The difference usually comes down to the performance or management fees of the fund.

The company promoting their fund is highlighting their lower management fees and how more of the returns go back in your pocket.

In this article, we’ll be discussing the key factors you need to consider when reviewing an investment product or service, their performance and identifying the backtested versus real returns.

The goal is to show which statistics are critical for you when evaluating a Forex managed service.

Demo account results versus real live trading

If you have been around trading for any length of time, you will know how different paper trading is compared to live trading.

Paper trading, or demo trading, is where you put your trading system to the test with virtual money to see how it performs in real time.

Paper trading is highly recommended for those who are new to trading and need to get familiar with the trading platform and how to execute their trades into the market.

Being able to test your execution and strategies in a simulated environment is an ideal way to get comfortable with your system and feel confident in your ability to execute your trades in the market.

Mistakes often cost traders a lot of money and a demo environment is the perfect way to see what mistakes you may make with zero real-life financial costs.

But those who have been around trading know the biggest pitfall of trading in a demo environment.

The biggest pitfall is the fact you have zero emotions connected to your open positions.

Your system may have generated seven losses in a row, but in a demo environment, taking the next trade is always simple.

But in real life, doubts creep in. You start to question your trading system. You start to question your entries. You start to wonder if your system is going to continue the losing streak.

As a result, in real-life, it is not uncommon for a trader to stop trading their system after a series of losses.

Murphy’s law would then jump in and the best winning trade of the year will pass you by while you are sitting on the sidelines, licking your wounds.

Argh. How frustrating.

Forex managed account – Hypothetical results versus actual results

So too with reviewing a Forex managed account service.

You need to know the company has real trading results under their belt on real client accounts versus hypothetical results.

Before we get into the important figures you need to consider, let’s take a look at discretionary trading versus mechanical system trading.

Discretionary versus mechanical system trading

There are two main types of trading systems a Forex managed account service uses, which are discretionary or mechanical systems.

Discretionary trading systems are where the investment manager will base their decisions on a series of rules over time and will have them all written down.

The discretionary investment manager can show the entry, exit and position sizing rules of their system and get others to trade it for them.

However, from time to time, the discretionary investment manager will override their rules and make changes based on new information they have at the time.

For example, leading up to the US presidential election, a discretionary investment manager may say, ‘We are going to stop trading two weeks leading up to the result and then resume trading once the dust has settled.’

As you can appreciate, the investment manager is using discretion to override their system, even though their trading rules may have provided several entry signals during that time.

A trading fund using a mechanical system also has a set of rules, but their rules are very black and white. The signal either happened, or it didn’t.

Regarding a major event, something like an election or upcoming non-farm payroll data has already been taken into account. As a result, all signals have to be executed when they occur.

A mechanical system trading investment manager knows the importance of hitting every signal as they never know when the system’s best trade is going to happen.

Backtesting discretionary and mechanical trading systems

Now you have an understanding of the types of systems a Managed Forex service will use, we can start to delve into how their results are portrayed.

Firstly, what is backtesting?

Backtesting is the process of seeing how your trading systems would have performed based on historical data.

It is important to know if the managed forex service you are considering has backtested their system and proven the success of their system.

Mechanical system traders have an edge here as their results can be coded into software like Metatrader 4 or other backtesting software and tested in seconds.

The challenge is for the discretionary trading investment manager.

As mentioned above, a discretionary trading investment manager has rules but can override them based on their experience and upcoming market events.

This means their historical backtesting will have biases. For example, seven years ago, an important market event may have happened, and they may have stopped trading. But the backtesting results cannot make those discretionary calls. Instead, the computer backtesting model will execute all trades and spit out the results accordingly.

Real trades versus hypothetical backtesting

This is where the rubber hits the road. You want to be able to see two things when it comes to reviewing the competency of your forex managed account service.

The first one is that they have been able to prove their system works on historical data. This is where you would ask for their backtested results.

But more importantly, you want to confirm they have tested their systems live in the market with real money.

Ideally, you want to be able to see a 9-12-month track record of live trades using client funds.

Nothing will beat the pressure of having to perform for client’s month after month with real money.

You must make sure you are placing funds with a managed forex service who has real returns under their belt.

Walker Capital live trading results

Our team have been investing in the Forex markets for nearly ten years and have tested hundreds of individual trading systems.

As a result, we take an individual approach with our clients and walk them through both our backtested historical results and our live results.

You will notice on our website when you review the performance of our funds, we show you the:

  • Equity curve from when we started trading client funds
  • Month by month results of live client trades
  • Performance statistics of every trade the system has executed live into the market

We highly recommend you consider the live results executed into the market when reviewing a forex managed account service.

If you can only see backtested results on historical information using computer models but no live client trades, then politely tell them ‘Thanks, but no thanks.’

Gross returns versus net returns

Wouldn’t it be nice if your managed accounts charged zero fees?

In the real world, it takes years of focus and a strong mindset to get to the level of being a professional investment manager, trading other people’s money. Trading is one of the toughest endeavours in the world to master.

As a result, investment managers and Forex managed account services like Walker Capital, charge certain fees to deliver your results.

The fairest model is a performance fee. No doubt you have thought about this when your industry super fund has a losing year but still charges you thousands of dollars for the privilege of losing money.

For details of Walker Capitals Fees and Charges please refer to our Financial Services Guide


Reviewing the fund performance based on the fees charged

One of our main goals at Walker Capital is full transparency, which is why we are putting this post together.

We want to make sure you have all the information at your fingertips so you can make an informed decision.

You can be assured the equity curves and month by month statistics on the four main systems we trade at Walker Capital are based on live trades in the market.

Having said that, it is important to note our figures are net returns have taken into account the fees and charges.

Hopefully, this post helps you understand the importance of real performance trading results based on live client accounts and not just hypothetical returns based on backtested data.

Are you interested to find out more?

Getting started with our selection of managed Forex investment is simple.

Here are the steps to get started:

  1. Schedule an appointment (Conference Call) with an Investment Manager
  2. Submit a Managed Discretionary Account (MDA) application with Walker Capital Australia.
  3. Open a trading account with the Walker Capital Australia’s executing broker.
  4. Select from our range of investment strategies and choose your asset allocation between the choices of accounts.
  5. Once all accounts are opened and funds have been chosen, our team gets to work and begins trading.

We welcome you to give our team a call to discuss your investment goals and objectives.

You can call Walker Capital Australia on +61 2 8076 2210 and we’ll see how we can help you achieve your investment goals.

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