This 5-Second Test Predicts Algo Blowups BEFORE They Happen

Hinzugefügt: 2026-05-17

[00:00:00]Welcome to module 1.3 of section one on warehousing risk. And in this section, we've learned already to see the signals, the surface signals that are going to kind of tell us, "Hey, we really need to look at something."

[00:00:15]And this [clears throat] is our first section we're going to dive into exactly one of the most powerful, easiest ways to identify warehouse risk, okay? And it's going to confirm what we saw on the surface. And this tool is literally our first line of defense, okay? And that is going to be the two versions of your account.

[00:00:35]And they're basically balance and equity, okay? Some of you guys understand this really well, and you don't have to be like a very sophisticated investor or have a lot of experience to understand it cuz the simple uh reality is it's just like owning a home or if you've ever considered buying a home, there's equity in your home, right?

[00:00:53]People say, "Yeah, I've got equity in my home."

[00:00:56]And and the thing about equity is it's just like equity in your home. You have Well, you own the home, and the home is worth like, let's say, you know, $250,000.

[00:01:05]All right? But you haven't sold the home, all right? So, you haven't realized that that profit or or that sale of the home. So, you have a balance of what you owe the bank, right? Or the balance that's in your account, that's on your loan. But you might have equity, and that that equity could be up up positive, that's a nice feeling, or it could be negative, and that's not good.

[00:01:24]And in general, [clears throat] that's the same thing that your trading account does, right? You have a balance, which is the closed positions, right? So, you you your balance only changes when you close entries, whether you win or lose.

[00:01:36]And your equity is [clears throat] the real-time value of your home. So, you might own a home, and you bought it for $500,000. And but the market is on a downturn, so your equity in the home is estimated to be $400,000. In or in in in investing, that that equity is actually a known number because there's a price that everybody knows that the current asset is buying and selling at.

[00:01:59]So, we have a much more accurate picture, but it works the same way. All right. So, this gap between balance and equity >> [clears throat] >> Okay, is the unrealized losses that are sitting in an account.

[00:02:11]All right. Now, sometimes it could be unrealized gains, but in this case when we warehouse risk, it's always on the downside, which is really problematic, right? Very very negative for the for the system.

[00:02:21]So, the smooth equity curve, all right, shows you a beautiful picture.

[00:02:26]Underneath is this I'm sorry, the the smooth balance curve shows you the beautiful picture. And underneath is this the real story of of this equity curve, which is showing you the real risk the system is is is experiencing at in its history and currently. Okay? And that is the big thing that we're going to talk about. There's two versions.

[00:02:47]So, how what is how does this convert something that's really dangerous, okay?

[00:02:50]Well, the idea is that you have published drawdowns. If they're showing you drawdowns, a history on on the balance, those drawdowns can look really small. They can look almost non-existent. They can be like, "Hey, we've only ever had a 5% drawdown."

[00:03:02]What they're saying is we've only ever realized a 5% loss from peak to trough, right? If you know what drawdown is.

[00:03:08]And it's just simple as like how much has the account gone down from its from its you know, starting point or its highest balance since it closed a position.

[00:03:17]But the actual drawdown history could be quite a different picture if we look at equity, okay? This could be extremely different. You could have 40, 50, 60, 70% drawdown. And in Steven's case, that could have easily have been a history that he could have seen that well, if I had a $400,000 account, I can easily be drawing down and be in in exposed $172,000 at a time. And as we discussed, in order to evaluate systems, we need to see the real risk. And so, what's really happening here is risk is being hidden from us because of the warehousing risk.

[00:03:49]And so, if we don't understand this concept, we can't make informed decisions about how good a system really is for us or anybody for that matter if we don't really see the real risk that's happening.

[00:04:00]So, why is this the earliest tell? So, the the gap that we see, right, from from a balance to an equity curve, why is this the earliest tell, okay? It's something that shows up right away, even before there's a realized loss, even before a system blows up, you guys can now have a tool that you will immediately recognize "Whoa, this system is warehousing a lot of risk. That means I have a lot more risk than is probably being presented in the numbers." And you can immediately get that before anything happens to you, and it's so powerful. So, if there's one thing that I want anyone to take away from this section in this entire course, it's this, okay?

[00:04:38]>> [snorts] >> It's and it's really the fastest way to spot if a system has no real edge.

[00:04:42]Systems that have real edge don't need to warehouse risk because they know that they will win over time, and they don't need to just hold positions and pray they come back, all right? So, when balance and equity curves are separating and the separation is very large and it's very consistent, okay, it's it's really that the system is trading noise.

[00:05:03]Um in other words, it has no edge, it's just ho- holding and it will n- it will won't it doesn't want to take losses, um and and it and it doesn't have a real edge.

[00:05:12]All right? It also is the big the big one, right? It tells you what's coming next. When a system is warehousing risk, this is an important concept, okay, then and it's not taking its losses, it doesn't have any risk management capped, there's no capped risk for it to perform. So, it tells you what's coming next, which is eventually that system will damage your account in a big or all a humongous way or completely decimate it, okay? That's that's a fact. I I it's something that some of you guys might have to you know challenge your own beliefs right now, but I really encourage you because this this is a course that's really showing you what's really happening. But you know, decades of being in the market guys, I know this stuff like the back of my hand. And it's it's very serious. And it's not really special. Any any serious investor, any serious um quantitative person who understands mathematics knows this is that statement is a is not a it's not an it's not an if, it's a when.

[00:06:15]And now and we'll talk more about it.

[00:06:17]So, the one question that we do what's our tool right that we can quickly ask ourselves and or ask for some somebody who's presenting a product to you. Is your reported drawdown calculated from balance or equity?

[00:06:28]>> [snorts] >> And that's just an important case study because like if they're if they're all reporting it from the balance, that's not necessarily a bad thing. It just needs to be reported or you just need to understand that it's reported from there so that you can check hey, is the equity curve does the equity curve follow the balance curve really closely cuz then there wouldn't be any distortion there.

[00:06:47]If it doesn't then you need to ask well, what's the drawdown from equity?

[00:06:51]And if you can't see the equity curve, then you still need to ask well, can I have the equity curve, okay?

[00:06:56]So, this is a huge a huge indicator, all right?

[00:07:00]It's so easy. I'm going to show you examples in a second.

[00:07:03]So, what does it look like when the line tracks together, okay? So, we've seen this line, right? Where there's lots of gaps and there's huge space and it comes and goes and and sometimes I'm about to show you some examples Excuse me. I'm about to show you some examples guys where there'll be open positions warehousing risk for six, nine months at a time.

[00:07:25]Um most of the time it might not be that long, but it's still a long time.

[00:07:29]What does it look like when the lines track together, okay? That is some that's a system that's realizing its losses that is not exposing you and not hiding risk. So, it's the warehousing of risk is not there when when a balance and equity curve are very much in line, okay? And this one's funny cuz it's not a completely accurate diagram.

[00:07:49]The the balance and equity curve should eventually come back very often and meet, right? When we don't have an open position. This this chart actually shows that there's an open position like the entire time, which is not exactly accurate. But, you get the point. We wanted to We wanted to show you that when they track closely together, that's what you're looking for, okay?

[00:08:07]And that means that drawdowns are realized, that there are no There There's many small uh discrete entries, okay? Whether it's 1 2 3 4 5 positions, usually never more than uh that on a single asset in a single direction because it's it's building a a position, but not extreme.

[00:08:28]And [clears throat] that lets you know there's transparency, okay? So, I will show you that. Um I'm going to actually give you uh a a example directly from some of the work I've done.

[00:08:38]Um and then I'm going to give you some examples from from stuff people brought to me. All right? So, again, here we go with warehouse risk. This is what we'll see, the split, right?

[00:08:48]Balance, beautiful, looks pretty.

[00:08:51]Equity, well, what's going on here? And a real system, uh this is actually um you know, a good example of what can happen. Um again, the lines are just separated um a little too much. They would usually come back together uh frequently as those positions close, okay?

[00:09:09]>> [clears throat] [snorts] >> All right. So, we've we've talked about Okay.

[00:09:16]So, we talked a little bit about the divergence in the quant question, but how does it confirm it really, okay?

[00:09:21]When the scenario is they only show you the balance only, okay? The system, we don't know. We have to investigate further, okay? So, the the the kind of logic here is the system may be holding open losers, but we don't know yet because the the equity curve will show us.

[00:09:35]If they deny showing you the equity curve, which is pretty rare, but uh in some cases they really will not and they will say, you know, we don't want to show or we don't have that. And and that's probably a good sign that there's warehousing risk because they don't want you to to know there's unrealized unrealized losses that they're not exposing, okay?

[00:09:55]Um the other thing would be the the simplest scenario is when you have both, you don't even need to ask. That's the beauty of our system and what I'm teaching you in this course. When you have both and you can see it on a chart, which we're about to go over an example, then you don't even need to ask. You know what it is, guys. You know it in in literally 5 seconds. So, that's the beauty of uh signal one, these or the the detection tool number one, the balance and equity curve divergence, is that it's an immediate confirmation of what you're seeing. It doesn't mean that those curves will never diverge, okay?

[00:10:28]We'll show you an example of what it looks like to have a real divergence in a real system and what it looks like to have a warehouse risk and it's going to be so obvious to you. So, let's get right into the examples. Can't wait to show you.

[00:10:38]Okay, so this [clears throat] is where the course gets really cool because these live examples and again you'll be able to ask me questions and we do calls all the time and I'm happy to get on with anybody and go over any topic anyway and and review live things because this is where the rubber really meets the road. So, first time we're looking at live stuff here.

[00:10:57]This is from and it's not necessarily the account that's important. I don't know, but the this is from one of the greatest examples in a very serious situation where where over a hundred million dollars was blown up, okay, recently with a with one of these Martingale systems, okay, and grid systems, okay?

[00:11:15]So, really important concept is you probably are familiar and you've seen this kind of chart, right? Very beautiful, very impressive performance, smooth smooth balance curve.

[00:11:28]But if we look deeper at it, we can immediately now see and you're probably seeing for the first time, well, what is that yellow line? This yellow line is the equity curve, and some of you are familiar with My FX Book, it's very popular publish publishing site um that's public and people can and publish the results, right?

[00:11:47]So, this [clears throat] the My FX does usually give you the equity curve and the and the balance curve, which is what they're calling growth, okay?

[00:11:57]And if we zoom in, we can see quite a bit of divergence going on in very serious ways over extended periods of time, and this is the coolest part. You can begin to see what we talked about in our introduction to what warehousing risk looks like is that this is when it starts to add positions, and these positions it get very deep, okay? And the equity in the account goes down drastically. In this case, 165% is what the growth is down to 111%. That is a at least 33% drawdown. And then as the position as the price retraces, boom, they get that profit grab on a very, very risky deep position that had uncapped risk. And this repeats over and over as the account grows. What we see when it doesn't do this is still the same thing. It's carrying a bunch of open positions, but they're very small and there's not a lot of volatility in the market, whether the asset classes that they're trading, um you know, there's no big there's no big position.

[00:12:58]So, it it carries these little tiny losses and then the win rate accumulates very nicely.

[00:13:04]Okay? But immediately, okay, what we can see is that this divergence is way too big and it's it carries way too deep for it not to be warehousing risk immediately confirmed, okay? It's it's done. We know what it's doing. You can immediately now identify it in 2 seconds, which is so cool. Um I know you're going to love using this tool.

[00:13:27]Um, the the interesting thing, obviously you can see this account um ended on July 19th, 2024. And the reason is pretty clear at this point what happened. Okay? Um, this account never recovered um like many don't.

[00:13:43]And um, you know, an example of this another way is this nice smooth equity curve. Okay, it has a few dips, right? So, it's going to show a little bit of that drawdown before this starts to happen. Now, look at this equity curve. For this this account is still live and this person, I don't know who he is or who isn't. Um, this was just given to me by somebody as an example.

[00:14:06]Look at the the open position here. It's It's had open positions carrying pretty extraordinary drawdown.

[00:14:13]Okay?

[00:14:14]For almost a year.

[00:14:19]That's what this looks like, guys. And now you can immediately see it. Well, what is the system doing? This is not a professional system, I know right away.

[00:14:25]This is not a real system. This is warehousing risk. And you can see that it's really struggling with performance when it tries to cap that risk, which means that it took a loss.

[00:14:35]Um, but when you cap a Martingale grid system, okay, we'll talk more about it.

[00:14:40]You don't get performance like they show on the marketing charts. But this is a great example, an extreme example of what happens um when you you're holding a warehousing risk for extended periods of time. And this account is probably not uh it's it looks like it's probably in a 40-50% drawdown right now. I don't know.

[00:14:58]Um, we could do the math, but >> [snorts] >> you know, that's not a comfortable place to be. That's not risk management.

[00:15:03]That's not a real system. And and we we don't have to even listen to anything else. We don't have to know anything else now. Now, as a sophisticated investor with this tool, immediately you know what it is and you don't have to waste your time with it um and then you don't have to look at it. So, boom. Such a great tool. Love this one. Um, now, let's take a look at what a real system does, okay? What a real system does, okay?

[00:15:26]So, um, obviously, you know, I have the most familiarity with a SkySail. That's what I do.

[00:15:33]Um, but you can see something really interesting when we do the dynamics on this chart. So, this is a 2-plus year live history of one of our products.

[00:15:41]The first thing you're going to notice is where is the yellow line?

[00:15:44]>> [snorts] >> Okay? The yellow line isn't there because it's so close to the red line, which is the the equity, that you can't see it.

[00:15:52]You can almost see it for a second. It's kind of hidden, but it's so close and it tracks so closely that it's not there.

[00:15:59]And that's And And that It's not saying that it has to be zero space, guys.

[00:16:03]Um, I really don't want to get, you know, if you really you have to have distance, right? Between your equity and your balance, or you can never do anything. You have to have open position somewhere, whether it's positive or negative, okay?

[00:16:14]Um, and what's often funny is that in the other systems, um, you know, these these martingale systems, they have this negative dip.

[00:16:23]Often times in a in a really solid professional system, a lot of times you can also have positive equity. So, you're holding open positions, but they're winning.

[00:16:32]Um, and that is a very different dynamic. So, you'll see that, but I wanted to show you that difference. Um, we'll get into showing you a little bit more why SkySail is different. I I probably, you know, what? Let's do this.

[00:16:43]Um, I'm going to show you uh a SkySail Quant Lab uh preview of some of the work that we do, and I can show you some examples about how a real system does a warehouse risk and what it looks like.

[00:16:55]So, actually, real quick, I want to show you another example before we get into that, which is one that, um, this is an example someone recently shared that's still live and it hasn't blown up yet, but if we quickly do our our detection tool, we can see, "Wow, this is you know, this is on these long time periods." They're longer, right?

[00:17:14]This has been running for 2 years and hasn't hasn't had a catastrophic event yet. The The difference between the balance and equity looks pretty quote uh close, but remember that you have to do it on relative of of of relative uh size, and you can still see it. And it's a indicator, okay?

[00:17:31]of what's going to come. And you can see this is a good example. This is holding open positions for April 2nd to May 9th, okay? A month and a half, okay?

[00:17:43]It's carrying positions, and they get quite far away when you really zoom in.

[00:17:47]This is a 12 13% drawdown, okay?

[00:17:51]>> [clears throat] >> It right off the chart. I don't know how deep it really went because we don't have all of the insight, but we have pretty close to it. So, the idea here actually I think it was like what is this for 15%?

[00:18:05]Okay. And that's what I want you guys to look at. Don't Make sure to zoom in enough to really get the the the relative size correct, okay? But this system hasn't had uh an issue yet, but now we know that it will. And that's the key. I really want you guys to pay attention to this. I don't want to see anybody anybody emailing me, messaging me later, um and and and having to tell me a terrible story. I want to keep you guys away from this stuff, but it's very easy to identify even when it looks good like this. And this is was a recent example of saying, "Hey, is this really close?"

[00:18:38]And I said, "No, it's not. It's definitely warehouse risk, and it looks like it's okay because it's run for 2 years without thing without a without a catastrophe. But the catastrophe is coming, guys, 100%. The The odds are certain. It will happen. Whether it happens this year or the next 12 months, I don't know. Um it could happen tomorrow. It could be It could happen twice in a year. It could happen three times in in a week.

[00:19:03]And it might not happen for 2 years.

[00:19:04]That's That's how these systems have been marketed because they fool you with this. Like the same reason Steven and every every general person who who it's okay to to to feel like well I didn't know. You wouldn't know and that's what this course is really teaching you. So so that's what this looks like and then you can see that the drawdown looks reasonable right now.

[00:19:25]And that that is not an indicator that should make you feel comfortable because we now know how we have a detection tool to know what's coming, what's going to happen. So the drawdown number looks good until it's too late and that's when this happens and it drops off a cliff.

[00:19:40]408 This is blown This is 50% drawdown.

[00:19:43]Boom. And you know what?

[00:19:45]Sometimes these accounts just take they take their system offline right when that happens because they don't want to ever admit that it went down to zero, guys. There was no saving this. Okay, this account did blow up. I do know that. Okay?

[00:19:58]So when we look at this stuff I I just want to I want to make that last point so you really understand that this can look well it's kind of close but if we zoom in it's still very significant. It's still having extended time and that's just because the reported drawdown is not yet huge.

[00:20:18]That does not mean that uh it's safe.

[00:20:20]That does not mean that should not give you You don't have to even look at this number if you look at this and that's the cool part. So let's go ahead and dive right into uh an example here um with the Sky Sail Quant Lab.

[00:20:33]Uh let's see what we got here.

[00:20:36]And let's go ahead and run something.

[00:20:37]This is a script that we've run to kind of explore uh one of our our products, right? Or our product in general, okay? And it's going to do a bunch of calculations.

[00:20:47]It's going to look at a bunch of data.

[00:20:49]It's going to do a bunch of the quantitative stuff. You don't need to know exactly the specifics.

[00:20:53]Um if you guys want to know what we're looking at or the data I'm I'm happy to share it but the important thing is the outputs here, okay?

[00:21:02]So we're going to talk about a little bit more of this stuff but one The first thing I'll show you is that the the max concurrent positions on our system over 7 years has been three.

[00:21:12]Okay, and that's three in the same direction on the same asset, okay? Which means that there's no chance that our system is warehousing risk, okay? And and we're going to talk about a few more of these things, but I wanted to give you a sneak peek. So, 40-50% of the time, we only have a single position, which means we're not averaging down, we're not gridding at all. And the other open positions generally mean that there are separate out specific algorithmic probabilistic plays that are happening that we want to get a deeper position or we're taking sort of a coherent new position based on new data in the market.

[00:21:48]So, really cool stuff.

[00:21:49]Um but let's get to three more really really good tools on top of what you just saw that are going to help us really confirm this, look for clues, and also identify a little bit more of the nuanced versions of warehousing risk that is still Martingale grid related, but could show up in different ways. So, stay tuned for that. Please don't miss this whole module. Um it really is going to be the the culmination of every tool that you can quickly use, and you've seen how this one already does it in 20 seconds.

[00:22:19]So, these ones are going to be just as quick, just as painless. So, let's protect our capital.