I got an email from a struggling trader asking whether it pays to sign up with a signal provider.
This is a good question and one you should be asking before making a decision whether to follow someone’s signals. When I studied Economics I recall the term Caveat Emptor, which means Let the Buyer Beware.
This certainly applies to evaluating a signals provider as you have more than just a purchase at stake. Without passing judgment on any specific signals provider, it is important to point out that in the world of social media it is easy to portray oneself as a trading guru and look to get followers.
Before I give you my thoughts I would like to tell a signal provider story.
It was many years ago when a newbie trader approached me asking for guidance. He had just lost 80% of his capital in one month following a signals providers calls. The signals provider showed a profitable track record trading multiple currency pairs, including the past month when this trader saw his account get crushed. As it turned out that month the signals provider did not perform well vs. most currency pairs except the South African Rand, where a large gain more than offset losses elsewhere. So while its track record showed a net gain for the month, anyone following its non-Rand signals probably saw negative results. This included the newbie trader who saw his losses compounded by the use of high leverage (in this case 100:1). This turned out to be wakeup call and to his credit, this newbie trader stepped back and learned how to trade relying on his own skills and prudent money management. Today he is still trading and has been successful at it.
Now to your question. I wish there was an easy answer but there are several questions you need to ask before considering whether to go ahead:
- Ask yourself whether you are looking for trading ideas that you can selectively follow or are looking to follow a signal provider’s calls blindly so you can match its performance.
- Ask about the style of trading, such as trend, swing, scalp, etc. The style will help you get a feel for what to expect and you then have to decide whether it suits you.
- Ask how the signals are delivered as that will determine whether you can execute the trades similar to the way the provider performs.
- Ask what time zone the signals are mainly delivered as you have to be able to receive them when you are awake or online.
- Ask how the signals are provided (e,g, entry, stop, target) and if adjusted, how are they delivered to you.
- Ask whether the provider paper trades or trades its calls in real-time. This is one of my pet peeves as I have not found a provider willing to put its money where its mouth is. In other words, a provider willing to put its own money at risk following its own signals would raise its credibility in my eyes. If paper trading, its executions will likely be better than what you will see on your own account.
- Are you comfortable with the risk the signal provider takes on its trade calls? This is very important as you do not want to take more risk than you are comfortable taking. For example, if you are used to risking 1% of your capital per trade and your average stop is 25 pips, how would you handle a trade call with a 100 pip stop that would put 4% of your capital at risk? You need to be aware of the risk involved and if you want to maintain your 1% risk per trade then you would need to cut your leverage accordingly. If you are not comfortable with the amount of risk the signal provider takes per trade then either don’t subscribe or reduce your leverage to lower your risk.
- Decide whether you are looking to match the signal provider’s performance or focus on just one or a few currency pairs it follows. This is important as you will need to have enough capital or adjust your leverage so you can follow all of the signals. If you are looking to follow only select currency pairs then your results will differ from that of the provider.
- Ask for a track record and see whether it can be verified. Then ask for a breakdown by currency pair and by monthly results. In this way you can get a feel for how it performs on specific currency pairs and whether it shows consistency or volatility in results from month to month. Look for drawdowns (e.g. losing streaks) as preservation of capital should be a priority.
- Ask about monthly subscription charges and cancellation policies. Compare the monthly subscription fee to the size of the account you trade to see if it is worthwhile for you. Do you have to pay if there is a losing month? The latter would be nice to have but doubt many, if any signal provider offers it.
- Be aware that your performance can be impacted by when you start following the signals. Ask for a summary of recent trade performance before you start. If you start during a losing streak you could see a drawdown out of the box. Vice versa if you start during a winning streak. Remember, no trader is right all the time.
With all this said I am not making a judgment on whether to follow a signal provider’s calls but to point out the due diligence you should take before making a decision. You need to study its track record so you do not get swayed by the promise of profits and get a feel for the actual performance. You need to be aware of the risk profile of the signals provider. You need to be prepared to adjust your leverage so the risk fits what you are willing to take. You need to know what questions to ask so you can make a qualified decision.
If you want to see how experienced traders analyze markets (for free), visit our Forex Forum.
Feel free to contact jay@localhost with any questions or comments.
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