Forex signal providers are firms or traders who regularly analyze the market for favorable trade setups which they send to their subscribers. Subscription is usually on a weekly, monthly or yearly basis. Some providers’ signals are manual, requiring you to place the trade yourself when you get the signals while others are automated such that your account copies the trade once a signal is received. The manual signals are sent by phone SMS or email and may be market orders or pending orders. Signal selling services have surged in recent times with hundreds if not thousands claiming to sell the best trading opportunities. Here, I will show you what you need to look for when choosing your signal provider.
Does the provider have a ‘verified’ status?
You need to know if the signal provider genuinely trades the market. It wouldn’t make sense that he identifies setups and don’t trade them. But don’t take his word for it. There must be a third-party-verified track record. Myfxbook.com is a legitimate third-party verification service. The signal provider must show you his ‘myfxbook’ link where you will check his account to be sure it is real USD and his track record to be sure it is ‘verified’.
How long has he been in the market?
You need to know if the services you wish to acquire has been tried, tested and trusted over a reasonable time period. You need to check how many years he has been trading and selling signals. The least you should take is two consecutive years without break. The higher the duration he’s been in the business, the better. Five years is obviously better than two years but a minimum of two is a reasonable guide.
How risky is his trading style?
Here you need to check several risk parameters such as:
- maximum drawdown
- drawdown relative to equity
- daily/weekly drawdown
- maximum consecutive losses
- average loss per trade
- average trade size
Maximum drawdown shows you the highest percentage that an account has gone down in the past. Aim for less than 15 percent. Together with the maximum consecutive losses, it helps you to know how much he’s let losing trades run before closing them. Drawdown relative to equity is not always among the available parameters but when it is listed, it tells you more about the trader’s habit of holding on to losing trades.
Daily/weekly drawdown tells you the highest percentage that the account has gone down in a day/week in the past. Anything more than 15 percent is too dangerous. Aim for 10 percent or less. Average loss tells you how much he loses per losing trade on the average. When compared with the average profit, you can get an idea of his risk-reward ratio. A sound strategy should have an average profit that is at least twice the average loss.
Average trade size can show you the percentage of his account he’s risking per trade. Risking more than 2 percent per trade is dangerous. Exposure can tell you the percentage of his account that is currently used to carry trades. Some traders can have many trades on at the same time; avoid such ones.
Which instruments does he trade?
Is he mainly specialized in currencies, commodities, indices, or stocks? If currencies, does he trade all the currencies or specialized in a few? Someone that specializes in a few currencies is preferable than a jack of all trades.
How many subscribers does he have?
A signal provider with many subscribers especially long-term subscribers is preferable to one with a few or without long-term clients. Happy clients stick around for long. Of course, you don’t use this parameter alone; combine with other parameters to make a better pick.
Equity curve is better than balance curve or growth/returns curve.
A graph is always displayed to show the returns over time. Look very carefully to be the sure that the graph you’re seeing is that of equity curve. See the difference: while the balance curve is plotted with the results of closed trades only, equity curve factors everything including drawdowns in open trades. So, it tells a better story about the trader and his strategy. Always look for gradual upward slope rather than big swings. Big swings indicate excessive risks. A strategy with gradual consistent returns is far better than a swinging one.
How profitable is this guy?
There are several metrics you can use to check the profitability of the signal provider. Some of them are:
- win rate
- profit factor
- maximum profit per trade
- average profit per trade
- profitable months.
The win rate is the percentage of trades that are profitable. It tells you very little but in combination with other metrics, it can show if a signal is going to be profitable in the long run. The profit factor is the total profit divided by the total loss. Greater than one shows that the strategy is profitable. Don’t trust it so much. Average profit per trade when compared with the average loss per trade can tell a lot about the risk-reward ratio of the strategy. Profitable months can tell you the percentage of months the trader has been profitable. It tells you a bit about his consistency.
How often does he trade?
The number of trades can tell you if the trader trades regularly or not.
Always compare signal service providers.
Check a couple of signal providers and compare their statistics based on the above parameters. Also check their ratings/ranking/reviews in traders’ forums such as Investing.com, Dailyforex, and ProfitF.
Other things to check especially for manual signals
For signals that need to be traded manually, you will also need to:
- know that the signals suit your trading style: you won’t want a scalping signal if you’re a long-term guy
- know the provider’s time zone: you won’t want signals when you are asleep.
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