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Is Timothy Sykes a fraud? The former trading wunderkind and small-time hedge fund manager now sells stock-trading DVDs and trading advice. Should you listen to him? Should you ignore him? Read on for the answer.

When I first came across Tim Sykes over a year ago I was skeptical. One year later, after $77,775.01 in profits using his trading strategies, I have turned from Sykes’ greatest critic to his most ardent fan. This is the story of how he changed my mind.

I first came across Sykes in March of 2008 and I wrote this critical post:

Timothy Sykes, the boy wonder who turned $12,000 into $1.65 million while still a teenager, has abandoned his hedge fund Cilantro to re-create his day-trading achievement in full view of the internet on his new blog. Sykes is best described as young, brash, egotistical, and annoying. Of course, an impartial observer would describe me in much the same way. Timmay and I also share the preference for shorting stocks over buying them. But rather than being two peas in a pod, we are polar opposites: Tim is the quintessential short-term trader and I am the archetypal buy-and-hold value investor.

I am not like some people who say that day trading is a crock and that it never works. It can work for some people some of the time. The problem with Tim Sykes is that he encourages others to follow in his footsteps by buying his happened to Richard Dennis, the noted commodities trader, who famously lost tens of millions of dollars in 1988 after his trend-following strategy stopped working. Sykes of course likes trading microcap stocks with relatively thin markets. This means that his system is especially prone to break when too many people start using it.

Trading takes a lot of time; this is particularly true for Timmay’s day trading and momentum trading. Most people have jobs, and very few people have enough in savings and enough trading talent to make a lot of money trading. So for most people, time learning to trade would be better spent nurturing their career or working a second job.

Trading any system takes incredible self-restraint and guts. Very few people have the self-control to be able to stick to a system even when it is not making money. This is even harder if a trader buys a system (say, from Tim Sykes), because it is harder to become truly convinced in the system if that trader did not invent it himself or herself.

Traders and investors should steer clear of Sykes’ DVD and his trading system. Those few who could be good traders would likely do better developing their own system rather than following Tim’s. Of course, I find Tim amusing, so I encourage you to read his blog for its amusement value.

Sykes and I had a rather entertaining back and forth in the comments on that blog post. After that exchange, I decided to do some deep research. I went back over every single one of his blog posts. I looked up the stock charts on every stock he mentioned to see whether his predictions about stocks were accurate. I looked at every single one of his previous trades (all verified by Covestor, on which he is the #1 ranked trader; please note that Covestor does not account for cash in a trader’s account when it measures performance; so while according to Covestor Sykes is up 48,000% since November 2007, and he would be up this much if he invested 100% of his account in each trade, his account is up only 475%). I realized that Sykes’ trading system worked. He was right far more often than he was wrong. His trades were consistently profitable. I bought his Pennystocking DVD and his book and I subscribed to his TimAlerts trading alert service.

I started trading using both by following his trading alerts and by trading on my own using what I learned from the DVD and book. Slowly, almost inexorably, the profits piled up. And it wasn’t just by piggybacking on his trades that I made money; when I traded stocks he did not trade I made even more money. As I write this, my total profit from TimAlerts is $28,093.77 while my total profit from doing similar trades on my own is $49,667.25.

In September of 2008 I wrote  Why I paid Tim Sykes $2000:

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 (note: I no longer use any brokerage accounts that Covestor can auto-follow, so my trades are no longer there).

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.

Conclusion

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.

Conclusions about Tim Sykes

Tim Sykes’ trading system works. He is selling the real thing, not a scam (unlike most other trading gurus). Trading based on his TimAlerts service has given me more than ample profits. Trading based on what I learned from his DVDs (I recommend Pennystocking 2, it is by far his best DVD) has been even more profitable. He is one of the few stock traders selling their trading systems who has an impressive and verifiable record. Furthermore, he is honest about the limitations of his trading system: it is not scalable. It would be hard to put more than $100,000 into many of Sykes’ trades and the best percentage returns often come in illiquid stocks where a $10,000 position would be the prudent maximum. But this Achilles’ heel of Sykes’ trading system is also a key feature, because it ensures that hedge funds and other sophisticated investors will not come to dominate this niche.

Disclosure: No Positions. I am an affilliate of Tim Sykes as well as a customer (although I did not become an affiliate of Sykes until after I had gained over $20,000 in trading profits using his system), having purchased multiple of his DVDs (I recommend Pennystocking Part Deux; it is by far the best) and being a Lifetime TimAlerts member. I own Pennystocking, Pennystocking 2, and TimRaw. I have a disclosure policy.