ZuluTrade Case Study: Forex Cruise Control
The rise and fall and ? of Forex Cruise Control (FCC)
Originally posted August 22nd 2012
Forex Cruise Control was ranked as number 1 from November 2011 until 23st May 2012. The 6 months before this period they were also always consistently in the top 10. During most of this period they also managed the most capital on ZuluTrade. However, they dropped to 17,000 when trades went against the system late May 2012. The graph below shows the historical performance of Forex Cruise Control. From the comments and reduction in followers we can deduce that several ZuluTrade customers lost money follow this popular signal provider. You can also click here to view the live ZuluTrade Forex Cruise Control performance stats.
This Case Study will look at the Forex Cruise Control strategy and why many followers got margin calls (and lost money). From the “lessons learned” we’ll also try to provide some tips on how to spot similar ZuluTrade “signal providers” or systems and either size your investments appropriately or avoid them. This Case Study will also apply to traders and systems on other social trading networks like eToro and Ayondo.
Forex Cruise Control Strategy
Trading the GBPUSD pair only, Forex Cruise Control will open a first position based on their own entry criteria, which seems to be sometimes with or sometimes against the trend (the exact entry strategy is difficult to extrapolate from the historical data on ZuluTrade, though not really relevant for the purpose of this article). On this position, Forex Cruise Control normally takes profit at about 15 pips. When market moves against the first position, extra positions (up to 4) are opened about 20 to 25 pips apart. These positions are left open until the market reverses and the total accumulated position moves back to 15 profit or break-even, when all positions are closed.
E.g. assume a buy was opened at 1.58000. When the market moves 50 against a new position might be opened at 1.57975 and one at 1.57950. At that stage the 3 positions would have an accumulated loss of 75 pips. If the market now only reversed 30 pips to 1..57980, the accumulated P/L would be 15 pips (i.e. -20+5+30) and Forex Cruise Control would close the position. (We’re excluding any potential ZuluTrade pip commissions, slippage or spread for the purpose of this example.)
Hence the Forex Cruise Control strategy will work fine in a volatile market where the price action is both ways. However if the price drops 200 pips or more, this strategy will start to struggle because a significant reversal will be required to move back to break-even. Before July 2012 this strategy was running without a Stop Level (SL) and hence the potential drawdown of your ZuluTrade account could be significant.
Nevertheless, the results of this ZuluTrade signal provider from October 2010 until May 2012 were very admirable. An average return of around 300 pips each month against a maximum drawdown of 1000 pips during that period.
What went wrong?
From May 16th when the first Buy positions were opened the GBPUSD started a fast drop of about 700 pips without much retracement. While up to that date Forex Cruise Control had accumulated a maximum drawdown of about 1000 pips in total, this ZuluTrade signal provider now moved into a drawdown position of over 3200 pips. At this stage Forex Cruise Control hedged their position by opening 5 selling positions. I.e. at this stage in essence a loss of 3200 was taken because opening these 5 sell positions against the 5 buy positions has effectively the same effect as closing the original buy positions. When the market still moved further down, the drawdown was hereby limited to the 3200 because all the positions cancelled each other out. When the market turned again, Forex Cruise Control closed the SELL positions first and the original BUY positions on June 29th. By doing this, the actual closed loss during this period was reduced to about 1600. However, from the point that the hedging started Forex Cruise Control effectively abandoned their normal strategy of taking 15 pip profits. When the decision was taken to close the ‘hedging sell positions’ the drawdown was still 3200 and had the market further dropped instead of ‘finally’ reversed, the drawdown would have been even more. Obviously at that stage it turned out to be a good call by Forex Cruise Control as it reduced the losses.
It’s worth noting though that anyone who had been following Forex Cruise Control pre-April 2011 would not have gone into negative equity for this signal provider during this episode, assuming the consistently used the same lot sizes. Personally we also managed to avoid losses from following Forex Cruise Control over time because we manually closed our positions.
When evaluating the strategy of a signal provider, try to understand how the strategy works. In this case it was clear to see that part of the strategy consisted of opening up to 4 extra positions against the current trend in anticipation of a reversal. It’s kind of the same strategy as going to casino and betting on one colour (e.g. black) until it eventually comes up. The longer red keeps turning up the more money is required to keep doubling your bets on the next spin to ensure you get all your previous losses back when black eventually comes up. In the same way, the more money, in terms of drawdown, is required by these type of Forex trading strategies until the market reverses. If you had unlimited funds (and the casino had no table limit), you eventually would always win with doubling up on black. The same with these strategies, with unlimited funds you can always keep adding to losing positions until the market eventually turns. I.e. the lesson here is, be prepared to incur a significant drawdown with these type of strategies and size your lots accordingly if you decide to follow them.
In addition, try to understand the risk vs reward of the strategy. In this case the reward of every trade cycle would be about 15 pips, and the risk would be the potential drawdown. Until May 2012 the maximum Forex Cruise Control drawdown was about 1000 pips, though because this is historical drawdown, there’s no guarantee the drawdown wouldn’t be significantly higher since no fixed stop levels were set. Hence always ask yourself whether the reward of the strategy merits the potential risk you’re taking?
Many followers of Forex Cruise Control probably lost their stake and received margin calls because they had assumed that the maximum drawdown would never surpass the previous maximum drawdown by much (or even never reach it). I.e. they bet on their account never being drawdown by more than 1000 pips for this ZuluTrade signal provider. And to be honest at that level, a return of around 300 pips per month looks indeed a very healthy return for a 1000 pip risk. The lesson learnt is that assuming the historical drawdown level is the maximum is a recipe for disaster (certainly when no fixed stop levels are used).
In our view, this ZuluTrade signal provider also probably broke their own strategy as soon as they hedged the 5 open buy positions by opening the 5 sell positions. As we argued before, this is effectively the same as closing the 5 open positions at a loss. Hence, when Forex Cruise Control decided to close the 5 sell hedging positions this had kind-off the same effect as opening up 5 new buy positions. Instead of targeting the usual 15 pips, the signal provider now targeted about 300 pips which reduced the drawdown (and loss) to 1600 pips.
The New Forex Cruise Control strategy:
Following this experience, Forex Cruise Control started running their new strategy with a fixed stop level of 250 pips. As per 21st August 2012, this level was hit already twice during July, accounting for the 433 loss during the month of July. And currently a stop level of 150 is suggested.
In essence, currently the strategy means that every time Forex Cruise Control takes a position (Buy or Sell), your potential profit is 15 pips and your potential loss is 250×5 = 1250 (or 150×5 = 750). While obviously the chance of market making the 15 pip move in 1 direction is higher than making a 150 to 250 move in the opposite direction, how do you feel about the risk reward ratio? Personally, these are not the Risk Reward ratios we go for.
We’d very much like to see the results of this new Forex Cruise Control strategy on ZuluTrade over a longer period of time (1 year +) before we’d consider following this signal provider’s new strategy, but we have our reservations that this new strategy will be successful over time. July and August were relatively quiet markets with sideways action, and even here the new strategy resulted in a loss in its first month of running.
We’re also not a massive fan of systems with fixed stop losses and prefer to look for traders who watch the market to apply stop levels depending on the current market situation (e.g. above or below some resistance or support lines) instead of strategies or systems that use predefined stops at fixed arbitrary levels (e.g. 150, 250 or 500). Again all of this is very much our personal view and any comments would be more than welcome. Losses are inevitable with trading and overall Forex Cruise Control still made almost 5000 pips in less than 2 years with their strategy. Again, only time will tell whether the new strategy will achieve positive results and as always your own money management is key … never invest money you’re not prepared to lose and always size lots appropriately to the strategy of the signal provider your following. View the current Forex Cruise Control performance here live on the ZuluTrade website.
Last updated: August 22, 2012