Reading the fine print on funding accounts

So today I wanted to talk about these funding sources again as I’m learning more about them, I don’t have accounts with any of them, but I know they’re becoming popular. You now can see advertisements from them all over the place and they’re running all these kinds of specials where you’re looking at, I don’t know, 50 to 80% off.

It’s kind of hard to avoid looking at the appeal of that in terms of the fees, but I want to come back to what’s really happening behind the scenes. Because someone heard the first episode where I had spoken about this and then came back and said, Hey, isn’t this really just a Ponzi scheme? And the answer to that is no. Because a Ponzi scheme to me would be one by which someone said, Hey, I’m making investments with this money. Here are the returns. You ought to invest with us. And then that investor gives the manager the money and that money goes to either lavish lifestyle cars, you get the picture or paying some returns to previous investors.

These models are more like you’re paying fees, you’re not really prop trading, you’re kind of paper trading according to some very strict rules. And once those rules are adhered to and goals are achieved, you’re given access to another level of an account and perhaps then even a third level of a level of account where there might be real capital at work. What I really believe is happening though is that there are a lot of folks who are paying fees, which are fees, they’re not investments, they’re fees. And those fees go to pay out the winning.

So it looks like a lottery more than it does a Ponzi scheme. I think if you don’t have any trading capital or you don’t have the wherewithal to go asking other people for capital and raise money because you’re afraid of rejection, you don’t like sales, any of the million reasons why you might be have limiting beliefs and want to hold yourself back because it feels more comfortable to be where you are than to change, this is an option because all you have to do is fill out some paperwork and give them your credit card.

But the rules with at least one of them was, I thought it wasn’t suspect but it was kind of suspect. I’ll give you an example. There’s one of them out there where you have a trading goal of say $6,000 based on a $100,000 notional value again on paper with a drawdown, any drawdown no greater than say $3,000.

So let’s say that you put on some trades and that they tell you the instruments you can trade and let’s say that you take your account up to $110k, so that is $10,000 in unrealized or realized gains. Once you’ve achieved that, you are, you’ve hit the profit threshold, they want to see you trade a minimum of 10 days per month so that you can’t just roll the dice, get lucky on your first trade or have skill on your first trade, make all your money then and then stop. They want to see consistent behavior, at least that’s what they say.

I’m not a spokesperson for any of these places. Some places want to see you can trade 10 days consecutively, which doesn’t fit a lot of people’s trading style. Because if you’re not trying to day trade, then you have to kind of become one and do excess activity that doesn’t fit your temperament and your personality. So anyway, out of the 25 or so trading days that you have every month, they want to see that you’ve traded at least 10 different days. Not consecutive days but 10 days.

They also say if you make money on the natural gas contract or the NASDAQ futures and you’ve hit your goal but you haven’t traded 10 days, that you cannot trade the micros or the minis to avoid losing bigger money because you haven’t put on 10 days of trading. So that’s not practical because in the real world that might very well be a strategy that you do. So they kind of otherwise keep you from good trading tactics. So I’m not for that policy.

The other one, the next policy though is one that I find to be even more striking and kind of damning and that is this. So say for that I was longer short natural gas and my account went to $110,000 again on paper, paper money, I have $10,000 in realized gains. I’ve met the profit threshold of $6,000 and then I enter more trades at which point the drawdown is $4k.

So in these circumstances you’re likely going to get knocked out and have to re-up your account for another attempt because the ratio that they want to see maintained at all times is 2:1, which means if you make $6,000, they don’t want to see more than a $3,000 drawdown. So you can put on that same trade that takes your account up to $110,000 and then have a trailing stop and say you get stopped at $106,500 here, you did good trading, you had a trailing stop, you made money on the trade, but because the drawdown was more than $3,000, you get knocked out of the test account and you have to pay another fee to get back into it. So this to me isn’t terribly practical because again, it rewards what I would consider bad behavior or not necessarily profitable trade trading. And so with most people not being able to probably overcome those types of hurdles where you make X amount of money but you also have a drawdown that’s greater than what they’ve set up artificially, it puts you in a tough spot to stay in winning trades.

So then you are in fact lucky one day or a couple of days, which is really no way to trade. You can’t trade on luck, you have to let the market do the work for you. So I feel like this is a good way to keep harvesting fees because if I’m only charging you say one to $200 or anywhere leaving with all the coupons that they have, it’s $200 or less. Sometimes it’s 80% off. So on a $200 product or service you pay down, what is that $40. Most people don’t look at $40 as that big of a deal. So they’ll keep saying like, okay, I’m going to do this month after month after month and this goes into the kitty to pay off the folks who win. You see, because most folks aren’t going to have the discipline that it takes. So again, it’s not a Ponzi scheme, but it is a bit of a lottery where people chum in some money and then those who meet the standard get paid out from the fees that people are paying in.

I don’t believe any real money’s ever at risk and you can count on 90% of the people losing because only 5% of the folks who do this make it anyway. So you can count on all those people basically blowing up and add the equivalent of they say 80% off for life. So you add $40, it’s $500 the year they look at it as an extra cable bill or for the opportunity to get to trade someone. Well they say money, but it’s really not money, it’s paper trading money. So just be aware of what’s going on those rules, although they look like, well two to one, certainly popular in terms of R or but not terribly practical.

Certainly for my type of trading where I would definitely give the thing much more room I wouldn’t get spooked if my equity ran up to say $110k and then over the next few days drew down to $105k. That doesn’t upset me. Maybe it upsets you, but I don’t have that kind of feeling in my stomach that would bother me from doing that. So just read the small print and be careful. I would not sign up for six different accounts and say, well all I need is one of them to hit because usually you have to jump through a few hoops to get there. So I would rather see you focus on one strategy to get you to pass the threshold and then take it to the next step.

As always, read fine print because that’s where all the details are and figure out if that’s a good thing for you because I can’t tell just by looking at the place every time I checked out one of them, there were all these specific rules that seemed to, I guess turning the thing into a bit of a contest. But on the other hand, it also put in some rules that I didn’t think were all that fair on some level and seeing as how they’re not really giving you money anyway, they’re not coming outta their pocket, they’re just reallocating the money from other people paying the fees.

Okay folks, like I said, I think tomorrow will be the last day this week because we have holiday here and I’m going to take a few days off. Certainly have plenty of other things to do and I will see you tomorrow, but then I’ll be back. I’ll be off the rest of the week and I’ll be back the following Monday. Thanks for being here folks. I’ll see you tomorrow.

This is a computer generated transcript.

Subscribe to the show  

Click here to  get your free copy of The Inner Voice of Trading audiobook.