Fraud Advisory: Commodity Trading Systems Sold on the Internet
The CFTC has seen an increase in websites that fraudulently promote commodity trading systems and advisory services. The following information is designed to help you identify this potential swindle.
What Are Commodity Trading Systems?
- Computer programs that signal when to buy and sell commodity futures and options contracts
- Signals are based on mathematical formulas and are typically technical analyses of trading data, such as trading volume and prices
- Signals are not based upon fundamental analyses of economic factors, such as supply and demand
- Technical analysis attempts to predict future price movements based on historical prices, price relationships and price trends
Problems You May Encounter
Beware of Hypothetical Trading
- Hypothetical trading results typically are based on simulations using historical price data or "real time" computer trading
- Promoters typically pretend they traded futures contracts at market prices that occurred sometime in the past
- Trading results calculate what these purported trades would have achieved had they been placed, based on actual historical prices
- Results often show impressive trading results and large net profits with only a few, small margin calls.
- The CFTC requires that the presentation of hypothetical trading results be accompanied by a specific cautionary statement warning of the inherent limitations of these results
- False claims of performance based on real trading when in fact the results are based on “hypothetical” or “real-time” trading
- Hypothetical results may not adequately take into account the ability of a trader to absorb trading losses or to meet margin calls. Many traders are unable to survive several consecutive trading losses and/or margin calls
- 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
Systems often fail to consider:
- market circumstances that affect traders and their decision-making processes
- a change in the trader's financial condition
- a stop-loss order might be executed at a better or worse price, or not be executed at all
- bid/ask spreads which might not be reflected in the prices used in hypothetical trading
- Be alert for the possibility that the system promoter manufactured results by selecting historical trades that would have yielded the greatest returns
- The actual execution of a trade could impact the price paid, especially in less liquid or illiquid markets
Beware of Hidden Costs
- Profit claims of promoters may fail to take into consideration the cost of purchasing or leasing a trading system and a subscription for a mandatory 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
- A user should take all of these costs into account because they raise the break-even point in trading
Is a Futures/Options Trading System Right For You?
- Are you able and ready to educate yourself about futures and options?
- Can you afford to lose your entire investment and more without a change to your lifestyle?
- Do you have the financial ability to risk losing much more money than the initial margin amount and sustain trading losses to meet margin calls?
- Do you know if the advertised results are based on actual or “hypothetical” trading?
- If the trader used the system in actual trading, how did he or she fare?
- Will the system promoter provide you with independent verification of the claimed trading results?
- Do you know the total cost of the system including purchase, fees and subscriptions?
- Do you know the current and past disciplinary status of the system promoter?
- 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
- Whether or not a trading system is used, commodity futures and options are typically high-risk endeavors
- No trading system can guarantee profits
- Not all system promoters are required to be members of the National Futures Association or registered with the CFTC. Check their registration and disciplinary status with the CFTC and the NFA.
If you have questions, are aware of suspicious activities, or believe you have been defrauded, please contact the CFTC immediately at 866.366.2382 or file a tip or complaint.