I previously wrote about Timothy Sykes and his attempts to teach stock trading to the masses. That post is now my most commented-upon post on this blog and one of the most frequently viewed. Since writing that post I have changed my views on Timothy Sykes.
First, I have concluded that at least at the present time Sykes’ trading system works quite well. This does not mean that it will necessarily continue to work, and anyone using his system should not put blind faith in it. That being said, the basic premise of short-selling hyped-up stocks should continue to be successful far in the future, although the details of how best to do that will certainly change. I believe in Sykes’ system enough to trade a decent amount of money with it, and so far I have made quite a bit of money trading his system. You can see some of my successful trades on Covestor (on which I am currently ranked 13th).
I have become so convinced of the benefits of Sykes system that I bought his DVD, subscribed to a year of his TimAlerts service (whereby he sends his followers alerts every time he makes a trade, and I even recently bought the first Lifetime TimAlerts subscription (for which I paid him $2,000). I even signed up to be an affiliate to sell his products.
Normally a trading system will either produce a good probability of a profit (i.e., a high percentage of trades will be profitable) or a good ratio of average profit to average loss. Sykes’ system generates both a high percentage of profitable trades and profitable trades that make far more money than unprofitable trades lose. In this sense it is the Holy Grail of trading. The system’s major limitation is that it generates very few trading opportunities where more than a few thousand dollars can be easily deployed, although there are occasional trading opportunities where hundreds of thousands of dollars can be easily used. Also, there are relatively few trading opportunities. This limits the amount of money that can be made with this system to maybe a couple hundred thousand dollars a year at best. However, this limitation of the system also minimizes the chances that hedge funds will exploit the same inefficiencies that the trading system exploits and thus render the system ineffective.
The other problem with a trading system that produces few trading signals is that it is hard to keep from over-trading. The hardest thing to do is sit and wait, as evidenced by Sykes’ own history of impulsive, forced trades. While he was still able to reap huge profits, others may be less disciplined. I have already seen evidence of followers of Sykes’ TimAlerts service trading way too much (and Sykes himself has criticized his followers for this numerous times). I think it likely that some of them will trade away all their profits by forcing trades when the risk/reward ratio is poor.
My Original Criticisms Still Stand
In my original article on Timothy Sykes, I laid out three criticisms of his plan to teach trading to the masses. These criticisms still stand, although these criticisms point out the limits of an otherwise powerful system, rather than revealing the ineffectiveness of the system as I argued in my original article. Anyone considering following Sykes should consider the following:
1. While Sykes’ system will degrade gracefully (meaning that if it stops working it will gradually generate smaller profits, not change quickly from generating profits to generating large losses), I have already noticed cases where he and his followers’ actions have changed the chart patterns his analysis relies upon. He has enough TimAlerts subscribers that they can easily move the market in certain illiquid stocks. This makes using his system more dangerous than if he did not have so many followers.
2. Trading takes time. For many of Tim’s followers, with tiny $5,000 accounts, the amount of time they spend trading the system (especially if they do not follow his advice and ignore non-ideal trades) can be disproportionate to their gains. While I am a full-time trader (I utilize a few strategies, not just Sykes’ strategy), many of his followers have other, full-time jobs. Those people would be wise to concentrate only on the most ideal trades, lest they ruin their careers in a vain attempt to get rich trading.
3. Most people do not have the emotional restraint to be successful traders, no matter how simple and effective the trading system they use. This is my most important criticism. As even Timothy Sykes points out, over 95% of stock traders lose money. Those who cannot handle the emotional demands of trading will likely lose money even if they try to trade a system as simple and profitable as Timothy Sykes’ trading system.
As an illustration of my third point, I bring you the following example.
Nothing is Foolproof: The Case of Ross
As a subscriber to Sykes’ TimAlerts I get to see the comments made by other subscribers; they often share their trades and thus I can get a feel for how Tim’s followers are doing. The problem with any kind of stock trading, no matter how good the system, is that it requires a human to trade it. Human emotions seem almost designed to prevent successful stock trading.
I present here the case of “Ross”, a subscriber to Sykes’ TimAlerts service. Ross should serve as an example that an an emotional, undisciplined person can lose money trading a good trading system. I should point out that while he subscribes to Sykes’ alert service, Ross has not bought Sykes’ DVD. He also appears to be the exception among TimAlerts subscribers — most who post their trades appear to make money.
Sykes bought 4C Controls (OTC: FOUR) at $2.85 on August 18th. At 12:20pm Ross posted [subscribers-only link] “I am in with 300 @ 3.00”. Sykes sold the stock around 12:55pm after it failed to go up as he had predicted. Ross posted that he was holding FOUR, saying “It looks like it is trying to work it’s way back up.” Sykes responded, saying “ross, in time, u’ll learn to cut lsoses quickly and not risk disasters.”
At 2:02pm, Ross wrote, “FOUR looks like it is going the right direction now.” Sykes castigated him, writing, “haha ross, looks like u got lucky, bad lesson.” Ross continued to hold FOUR overnight; the next morning he wrote, “Well I learned the hard way and lost more then half my money on FOUR this morning. I got in @ 3. and just sold for 1.35 That hurt. All my other trades I have done have tanked on me as well. Pretty much lost most of my money. Looks like I am out of the game for a while.”
While trading FOUR lost Sykes money too, Ross also managed to mess up easily profitable trades by letting his emotions get in the way. He said, “I messed up on USS and ZYXI and EVSO as well. I also made some other trades a friend suggested as well and they went the wrong way.” This was despite Tim having profitably traded those stocks. I myself had a profit margin of over 20% on USS.
If you want to try trading stocks, try following Tim Sykes’ system (I suggest just reading his website and analyzing his trades for a few months, although you can go ahead and directly buy his DVD or TimAlerts trade alerts service if you are rash); it is the best stock-trading system I have seen, as evidenced by Sykes’ top rating on Covestor and his multi-year performance record. However, most stock traders will lose money because they let their emotions rule them; using a profitable system will not prevent them from losing money. Recognize your limits and do not try to trade if you do not have the requisite emotional control. Don’t be like Ross.