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What to Look for in a Signals Service
I count myself as being very lucky as a trader – I spent a long time researching the Forex product market, spent many a long hour in Forums and generally devoured as much information as I possibly could before I started trading live. For this reason, I have never lost money on Forex. One reason was that I decided to use Forex signal services when I started trading live, rather than use my own trading system.
I can tell you that I spent literally hundreds of hours looking for Forex signal sites on Google. I read as many reviews as I could and emailed each provider with questions. I even had a monstrous Excel spreadsheet with results!
I don’t particularly recommend you do what I did.
In the course of doing this research, I have learned a lot about Forex signal providers and what to look for. Some of the information that follows is somewhat subjective, but may apply to you as well. I recommend you take all my objective advice!
Track Record
This is the first thing we all look for, naturally. However, it pays to verify the Forex signal provider’s record to the best of your abilities. Look for one of the following if you can:
- Reviews on sites like Forex Peace Army. Look for reviews by lots of people and with a good average rating (over 3 stars) over a period of time. Do be aware that the majority of products featured on Peace Army are really independent reviews by members of the public but also be aware that some of the 5 star rated ones on this site are not as trustworthy, as they are offered by the owners of the website.
- Reviews/recommendations by people like Marc. It would have made my life a lot easier if this site had been here when I started, I can tell you!
- The increasing popularity of sites like www.myfxbook.com and MT4 Stats - Share your MetaTrader 4 Statements with the world allow Forex signal services to show you their real trading history, and these are generally the most reliable gauge of a service. However, even this is not foolproof – I recently signed up for a trial with a Forex signal service that looked excellent and was featured on one of these sites. Imagine my horror when I found out they had a 1,000 pip floating loss! Yes, these sites can be set to only show closed trades, so be careful!
- ALWAYS pay attention to Risk:Reward ratios. If the service uses a 100 pip stop loss and a 50 pip take profit, I personally wouldn’t use it. It has a statistically higher chance of losing over time than one with, say, a 1:2 Risk:Reward ratio.
I have had several occasions where I have found sites with no performance on the website. This is OK, email them for their information. I have had a couple of times when these emails were ignored (after previous communications). If this happens, run away – and fast!
Also ask if the providers give stop loss and take profit levels – if not, you should be wary of their published results.
Trading Style and Signal Delivery
This may sound like a stupid thing to say but always check when signals come and how they are delivered. SMS is nice, but do you want signals to come at 3am where you are?
Do you want signals to come at a fixed time every day or the kind that come any time of day or night?
I was with a superb signal provider when I lived in Dubai but I missed all the trades as they came at 4am every time, despite the fact that they were advertised as being 24/5.
Always check that the signals will fit your lifestyle and time zone before you sign up.
Pip Count
This is something that I made a mistake with and I am sure that many other people will make this mistake as well.
When I started looking for Forex signal services, I made the critical error of looking for tons and tons of pips, dismissing sites that had lower pip counts. Let me show you why this can be a big mistake using the power of maths:
Forex Signal Service 1:
Average Monthly Pips: 1,000
Average Stop Loss in Pips: 150
If we apply proper money management, and assuming a $10,000 trading account we get:
$10,000 (Equity) / 50 (2% Risk) / 150 (Stop Loss in Pips) = Pip Value of $1.33
Average Total Winnings Per Month = $1,330
Forex Signal Service 2:
Average Monthly Pips: 500
Average Stop Loss in Pips: 50
If we apply proper money management, and assuming a $10,000 trading account we get:
$10,000 (Equity) / 50 (2% Risk) / 50 (Stop Loss in Pips) = Pip Value of $4
Average Total Winnings Per Month = $2,000
As you can see, the signal service with the lower monthly pip total is actually more profitable. And don’t think that this is an extreme example – I have seen plenty of signal services that use stop losses of more than 200 pips!
Always ensure you know what the average stop loss of a Forex signal service is before you sign up. If it’s not on the service website, email them.
Free Trial
A Forex signal service should ALWAYS have a free trial. If the supplier doesn’t offer 7 -30 days of free signals OR a money back guarantee, they obviously have no faith in their abilities. And neither should you.
Use the trial period to test the signals on a demo account and check your results against the ones advertised by the provider.
Handling Losses
Knowing when to bail out is almost as hard as finding a good service.
By its very definition, Forex trading involves losing. If you have found a reputable service with a decent track record and they hit a losing streak, you can do one of two things: stop trading (which will almost certainly invoke Murphy’s Law and mean all the signals you don’t take win) or, better, reduce your stake until they get it together again.
It’s somewhat unfair, though human nature, to look at a month’s trading as a losing one – taken as a Quarter, a service may have done very well, having just hit a slight bad patch for a few weeks. You wouldn’t describe a bricks-and-mortar company as a failure because it had a bad month, would you? Unfortunately, this arbitrary way of looking at things can reduce the prestige of a provider in many people’s eyes.
It’s really down to you to know whether to stay or go, but you will definitely want to leave if one of the main traders leaves the company OR the service gets taken over by someone else and results go down the pan. These things have happened before and will likely do so in future.
Continue Learning
Forex, in my opinion, is a business. If you treat it as a business, you will massively increase your chance of success.
I see nothing wrong with Forex signal services in principle – I am merely outsourcing my lead generation, if I can phrase it that way.
However, the “entrepreneur 101 handbook” states that an employee who is indispensable is, in the cold light of day, a potential liability. If he/she gets hit by a truck tomorrow, how will the company cope?
The same principle should also be applied to signal services. There is simply no guarantee that your provider will be there next month. For this reason, you should not stop your Forex education under any circumstances if you wish to remain in business.
By continuing your education, you will also get to the stage where the signal is not something to be blindly followed – it is a mechanism to alert you to the fact that something exciting is happening in the market, and that a trading OPPORTUNITY, not a trading CERTAINTY has arrived.
By doing this, you will dodge some trades that are illogical or go against your trading aesthetic and will probably mean you end up doing better than the signal providers themselves at the end of the month!
I personally like Forex signal providers that trade pullbacks on trends. This fits into Elliot Wave theory, and basically means that the trend will slightly reverse a few times as it continues upwards or downwards.
I like to take a chunk of each move in the trend but don’t have the time to monitor the market to see when a correction is about to occur. This is where a decent signal service comes in handy.
I will always check the charts for my own peace of mind before placing the trade. Trust, but verify, as Ronald Reagan used to say.
I hope this article was useful. Let me know if you have any comments or questions.
Simon.
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Thanks!
Originally Posted by atletrader
