PsyQuation launches using Behavioral Profiling to improve Retail FX trader performance – LeapRate Exclusive

LeapRate Exclusive… Every once in a while we come across a team developing a new trading tool or idea out there which catches our eye as something interesting and different. And while the tool is still new and admittedly unproven over the long term, the founders of PsyQuation have developed a new way to improve trader performance – and to prevent traders from ‘blowing up’ their accounts – using techniques and technology from the school of Behavioral Profiling.

The PsyQuation tool is of course aimed not just at Retail Forex traders, but at the brokers who serve them. Traders who last longer, make money and trade more are worth a lot more to brokers than those who lose quickly and move on.

LeapRate spoke with PsyQuation co-founder Michael Berman, who explains all. But first a brief video.


LR: Hi Michael. Please let us know a little more about PsyQuation, and how you and Vlad came up with the idea for it.

Michael: The story behind PsyQuation is many years in the making.

Michael Berman, PsyQuation

Michael Berman, PsyQuation

I have been trading as a professional money manager since 2002 and roughly 6 years ago hired Vlad (CTO and co-founder Vladimir Krouglov) as an outsourced quant. Vlad is a Ph.D. in Mathematics and recipient of Ukraine’s young scientist of the year award, was new to trading but interested in applying his exceptional problem solving skills to the fast moving pace of the capital markets. I have a Ph.D. in Economics with a focus on Behavioural Finance and have traded across all asset classes applying an eclectic style I call “Quad Unity Theory”, i.e. my style incorporates elements of fundamental, technical and quantitative analysis with a behavioural overlay.

In early 2012 I proposed to one of my investors the idea of building an online incubation platform for traders that would essentially allocate trading capital based purely on an algorithm that measured a traders skill coefficient. In mid 2013 one of the worlds most established retail FX broking brands reached out to us to discuss ways in which we could work together and develop tools to improve their traders performance as the work we were doing and our novel approach had caught their eye. The idea of doing something in this space resonated well with Vlad and myself and we were eager to eventually do something impressive.

About 2 years later having built up a community of thousands of traders and allocated tens of millions of dollars we merged our efforts with a US based emerging manager platform who had a similar but grander vision than ours, freeing us to explore other options. Having analysed thousands and thousands of trader equity curves and honed our skills observing the good and bad of trader behaviour we felt confident that we knew what we were talking about and had something valuable to say.

In Jan 2015 the opportunity presented itself when I discussed the idea with some angel investors and by March 2015 we had a company incorporated. Building the team took time and by September we were all hands on deck, and now after a grueling 9 months of hard core development we are ready to launch our beta version on Friday.

LR: What problem are you addressing?

Michael: The problem is that retail FX traders perform very poorly, which has obvious consequences for the trader as well as for the broker’s bottom line as they are faced with a shrinking customer base and increasing costs of customer acquisition. In a zero sum game, after accounting for transaction costs it is clear that the odds are stacked against the trader. It is not to say that it is impossible to be profitable but rather it is extremely difficult.

One of the main reasons why retail FX traders perform so badly is due to their poor risk management and a weak understanding of the high leverage effect. Speaking from a behavioural perspective trading amplifies lots of human emotions and these often translate into poor financial decision making. Our objective is simple on paper, we want to help traders become more profitable, however it is far more complex in practice. It is impossible to take someone with no edge in the forex markets and make them into a consistently profitable trader.

Our statement of making traders more profitable is a very important distinction, we cannot make a trader profitable as that can only happen if the trader has an edge and we are providing an overlay to an existing strategy.. Rather we seek to make a trader more profitable by eliminating trader mistakes. It doesn’t matter who you are everyone makes mistakes because we are human. And if you say you trade an automated trading system the person programming the system is also human so systematic traders are also exposed to human bias. As we have progressed along our development journey we have come to realise that the PsyQuation software is useful across the full spectrum of trading talent. From the newbie trader who has never traded before to the 20yr veteran managing mega bucks our alert infrastructure will be useful to everyone’s trading.

LR: What exactly is Behavioral Profiling? How do you apply it to improved traders’ results?

Michael: Every thought finds expression through human action (behaviour). We all have thoughts which therefore leads us to action, but our action is heavily influenced by the emotions laced in our thoughts such as when we angry, overconfident, greedy, impatient, scared, resilient, etc …. . We don’t believe there is a universal emotion to describe each trading behaviour. In other words not all angry traders perform the same way, we are not so interested in trying to classify specific emotions into a one size fits all, we are far more interested to see how you the trader behaves as evidenced in your behavioural DNA as per your trading actions in your brokerage account.

Our approach is not prescriptive we do not want to impose our subjective view on the trader, our approach is more aligned with learning from evidence contained in big data. With this approach we seek to see what the critical points are in defining the success of traders as well as the critical factors leading to a traders downfall. By creating profiles of these two categories of traders we can learn from our environment. The bigger our environment the more cases we have to study the smarter our models become and by default the more profitable the PsyQuation trading community becomes who follow our suggestions.

The trader user experience is one where a series of alert notifications pop up on the traders screen (also via email or sms alerts if preferred). The anatomy of these alerts is such that they follow a clear path of logic with rolling look back windows to observe whether remedial action has been taken by the trader. Perhaps the best way to see the alert is as a complex series of feedback loops, which will continue to observe and notify and suggest corrective action if certain alert thresholds are penetrated. We believe we are the first trading software vendor to incorporate the software project management style of a Kanban board into our alert management system. Our alert board clearly displays the alerts in their various stages of using Kanban philosophy to provide the user with an intuitive and easy to manage experience.

LR: Are there any other novel features in your software offering?

Michael: There are a number of innovate features that we have incorporated into PsyQuation’s software.

The first point is that there is nothing for the trader to load, we didn’t want traders to go through the annoying exercise of loading any software and their trading history. When you login into PsyQuation it is simply all there. To kick the proverbial PsyQuation engines into action you are required only once to input two important parameters that calibrate the sensitivity of the respective alert for each trader. You are required to input your target annual return and the maximum tolerable drawdown, from there the magic happens, and your PsyQuation journey is visually captured in the form of a snail trail chart.

We have been very deliberate in the design of our dashboard and approached it with a less is more philosophy. We have cut our performance metrics back to the bare essence, we think many of the current trading dashboards lead to analysis paralysis due to the large number of performance metrics flickering away on the screen causing overload and confusion. We believe we are the only trading software vendor that provides each trader with an intraday equity curve from inception providing lots of useful information in an easy to understand visual way.

Many people ignore the huge amount of information that is present within an intraday equity curve. Take a martingale trader for example it is quite easy to have a situation whereby the trader incurs an intraday 50% drawdown but ends the day up with a small profit. In this example the huge amount of risk in the account is ignored when looking at it with end of day statistics, which is the traditional industry approach. Computing power today and the scalability of the cloud has enabled us to make this computationally expensive but essential feature part of our standard product offering.

There are a number of other innovations we are working on which we will share with our community as our research progresses.

LR: What have the beta results been so far? Can you quantify the improvement which you believe traders can achieve?

Michael: Before I answer this question more directly I would like to explain that there are two approaches to our alert research. There are a alerts that lend themselves to mathematical certainties, in which case the body of knowledge from our database is not a factor used in deciding an optimal result – the solution we use is pure math. However, the more behaviour biased alerts come from research performed on our database which is continuously being updated and calibrated – learning from itself. In all cases of the research we have conducted using historical data and universal formulae we can demonstrate significant overall performance. We are not talking statistically significant improvement but rather meaningful improvements in the order of 25% – 50% in total performance.

However we would prefer not to make a big thing of theoretical or back tested improvements, but rather keep a close dialogue with the community demonstrating actual improvements as we have real traders using our software. We have all seen brilliant backtest results fail in reality, we would rather be judged on the actual difference we make to traders not on any marketing tease. We are quietly confident that we will achieve our goals.

LR: What is PsyQuation’s business model? How will you be making money?

Michael: To use PsyQuation software you will need to open an account with one of PsyQuation’s 6 broker partners, as we will be acting as introducing brokers to these leading names in the retail FX space. There will be no cost to traders using our software as we earn our fees as a commission rebate from the broker. There are no markups on commission and no extra hidden fees imposed on the trader by the broker. We see this attitude from brokers wanting to support their customers as a very positive step in the retail FX industry.

Our overall vision is to become a B2B enterprise software vendor to the broker industry across all asset classes (stocks, futures, options). We have started with the retail FX market and already have built api connections to a number of trading platforms, in the second half of the year we will be creating api links to all the major trading platforms as opportunities present themselves. This Friday the 20th of May we will launch our beta version, allowing up to a maximum of 500 traders the opportunity to trade a demo account that we will provide with PsyQuation analytics. We encourage all who are interested in participating in our beta phase to visit our site and register your interest.

Read Also: