Part IV THE NEED FOR EXTERNAL AUDIT
Trading is the kind of activity where there are no clear theses and where two different traders may produce absolutely opposite results based on identical rules. The financial result or net profit is the only measure of success in the foreign currency market. However, at times, after their first win in the market the trader completely forgets about everything, even the rules they used to follow not so long ago, too.
The thing is that investors' involvement varies. As it turns out, the absolute majority loses caution after 2-3 months without a loss after money was invested and leaves the trader without due care, looking at the balance of the trading account only from time to time. Well, no wonder that after control 'from above' eases up, the trader becomes less cautious and problems are inevitable if the trading strategy is not followed or is followed in part.
Independent audit becomes an absolute need for the investor's protection not only because it rules out wrong actions of a trader but also provides the investor with necessary information on a number of issues. Important things taken into consideration when analyzing a trader's performance include:
- control of potential risks: trades are analyzed to establish the maximum risk and management of the trade to control losses and maximize profits, and observance of rules of the total portfolio risk and risk for each individual trade.
- capital management: the importance of capital management is best illustrated by analysis of a trading account drawdown. As a reference: a drawdown is the total amount of money you lose expressed as a percentage of the total size of your account. The relevant question here is recovery after a drawdown. For example, in case of a $5000 account and a $2500 drawdown, it is 100%, not 50%, that has to be regained to get back to breakeven because a larger drawdown increases the required recovery ratio geometrically. Traders that do not have relevant experience can face serious psychological losses. Hence, the importance of continuous control over the trader's actions and timely assistance in case of critical situations. One needs to keep the maximum drawdown between 20-25 %. As soon as the drawdown exceeds this limit, the trader has to stop trading to reevaluate the market and their method.
- goal setting: everyone knows that a good entry point is only a small part of success. The trader needs to set clear goals to him or herself aligned with their trading system. Essentially, as soon as your profits exceed your initial risk, close half of the position and move the remaining position's stop-loss to breakeven. This method will bring the trader, in the worst scenario, a no-loser, while the investor still has potential profits for the remaining position. This is particularly important for short-term trading where large profits per trade is a rare occasion.
The starting point for analysis of a trader's performance is awareness that trading itself is far from the principles of higher mathematics and is completely about understanding goals, inherent risks and psychology. The list given above may be inexhaustive, we believe it can spare the trader and, in turn, their investor most trouble.
At many investors' requests the decided to introduce a new service - audit of traders. Our experts are in the position to carry out a comprehensive independent external audit for further analysis and preparation of necessary information to the investor, including such services as:
- initial examination of the trader's financial statements, strategy and hiring recommendation;
- monitoring of the trader's reporting process and transparency of financial information during their operations in the investor's managed account;
- daily monitoring of the trader's positions, including the current view of the situation, significant changes in the trading account;
- control over the trader's compliance with principles of their trading system such as risk control and capital management;
- control over compliance with legal principles;
- monthly analysis of the performance achieved by the trader and their trading system;
- clear analysis of reasons for the account drawdown based on a detailed examination of how trades are opened, maintained and closed;
- personal recommendations to the trader on current issues, including their trading strategy (its adjustment);
- detection and resolution of the trader's psychological problem (the principle of trading seasonality);
- recommendations to the investor about hiring a new trader if the trader fails to duly perform their obligations.
Professionals of the set out to maintain strict confidentiality of the client under any circumstances. This is why audit reports and findings are discussed only with the investor, an authorized representative and the trader subject to consent of the investor him or herself.
Please contact us for a free consultation on asset management and trader selection.
Yevgeniy Olkhovskiy, Toronto, Canada
The Land Association of Canada, the Masterforex-V Academy, canada@masterforex-v.org
