I have recently concluded that the reason so many traders lose money in the Forex market is primarily a lack of knowledge. Most of these losers are enticed by the Forex market after watching stories of successful Forex traders on YouTube and believe it is a get rich quick scheme – they quickly realize it is not. As soon as they start losing money, they turn to trading signals to try to make their dreams come true instead of actually learning the basics of trading.
Do not get me wrong, I am not against trading signals; I think they are a very good resource for traders to maximize their profits, but it is better to become your own trader. I have several reasons for believing this, first, because you will only become bitter if you lose money due to a trading signal. Second, because you will be dependent on the signal provider and will never learn to trade on your own; what do you do when the signal provider suddenly quits? Finally, it is very difficult to find reliable trading signals.
Therefore, for those who do not want to put in the effort to learn and also for the experienced traders who would just like to gain an edge, this post is going to help you distinguish the good from the bad signals.
Just what are trading signals?
A trading signal is simply a suggestion, clue or hint about how the markets will move in the future, providing the trader with help in deciding which way to trade. Individual traders who are experienced broadcast most of the signals and the subscribers get to copy their trades. Nowadays, there are even signals that only make use of trading robots, or automated trading, which is also very profitable. Automated trading signals have the added advantage of lacking human emotion, which can affect the trader when they know they are providing signals to other traders.
These signals come in different forms, but the most common are:
These trading signals are integrated into the Forex trading platforms. The most common platform is MetaTrader 4, and many trading signals are targeted at the platform’s users. On the MetaTrader interface at the terminal window, a tab for signals looks like this:
From there, anyone can subscribe to any signal they like and that signal will initiate trades on behalf of the trader.
Unlike the integrated signals, which initiate the trades, trade signal alerts are notifications that you can receive on the trading platform and even on your phone as a text message or email. After receiving the alert, it is up to you, the trader, to place the trades manually. Such an alert trading signal would appear like so:
How do you identify the best trading signals?
Many traders have started offering their own trading signals, and it is free to do so. This is partly because they want to earn some extra cash (most trading signals have a monthly stipend), but also because these traders are overconfident in their skills. I could dive into the argument that a truly successful trader would not start a trading signal just to be paid $20 a month, but that is for another day.
Unfortunately, we live in a society where some people are just after recognition and fame, to known as the best Forex trader, and this pushes some traders to offer trading signals just for this purpose. The problem with this approach is that, in order to make huge profits and impress potential subscribers, they will take bigger risks and not pay too much attention to risk management. This could be risky because, even though there may be enormous profits at the start, they are essentially gambling, and in the end, the fall may be tragic.
If, for whatever reason, you would still like to make use of trading signals, perhaps you don’t have the time to learn and trade on your own, there is still some hope.
Check the signal provider’s details
Most amateurs will look at the signal’s growth and profit in percentage, but a more experienced trader will look for more subtle clues that tell them about the trader’s strategy. Some of these factors include drawdown, which is the difference between the amount of capital in the account and the equity, which varies depending on the profits or losses incurred from the open trades.
In the image below, you can see that the trading signal is extremely profitable, but there is also a warning to subscribers about the large drawdown.
A trading signal with a large drawdown is characteristic of a high-risk strategy and probably the lack of a stop loss as well. This is obviously a risky trading signal and you should only use it if you also share such a high-risk appetite. Even though you want to find the trading signal with no drawdown, it will happen even to the best traders. The only thing to consider is the ratio of drawdown to the amount of gains. Generally, you should avoid any signal with more than 50% drawdown completely.
Other important details to take not of include:
- the period over which the signal has been in operation, and generally, you want to subscribe to the signal with a longer period of existence
- how many subscribers there are and how much they have invested; this shows if other traders have confidence in the signal
- monthly and annual growth; the average growth of the account balance should reflect your expectations
The above are additional details about the trading signal, all of which should be carefully considered.
Check the source thoroughly
I have said it once before, and I will say it again; make the most out of Forex forums and communities that discuss Forex-related topics. It is through these platforms that you find information from other traders about the effectiveness of a trading signal, Forex brokers and any other queries you may have. In addition, you are much more likely to find unbiased information because the comments will be from individual traders with nothing to gain from you.
We shall see some of the most reliable sources of trading signals in the next session below, but you should not limit yourself to only those sources. I have found some very reliable trading signals in obscure websites, but I had to weed out most of the scams. The idea is to do your own research thoroughly about the signal provider, regardless of where you found it.
Test the signal on a demo account
It’s not enough to just study the signal’s past performance, you also have to prove if it really works in the present. To do this, the best way is to subscribe to the trading signal on a demo account first, where you won’t be risking real money. Then test the signal for at least a few weeks before using it on a real account. In fact, you can subscribe to more than one trading signal so that you can monitor their performance and choose the best one.
After you feel confident that the signal is profitable, you can gradually integrate it into your real account by modifying the percentage of your capital the signal can make trades on. In MetaTrader, the window below is used to adjust the amount of capital you’re willing to allow the signal to initiate trades with.
You should keep doing this for a few weeks, slowly increasing the percentage the more confident you become in the signal until you feel completely confident to hand over control of your entire capital.
Where do you find the trading signals?
Sources of trading signals are many, but only a few can be relied upon:
On the Forex brokers list, you will find several brokers who have approved some signal providers among their client base. Such a signal provider would have undergone scrutiny by the broker’s analysts to assess their performance and ascertain whether they are fit to provide trading signals. In addition, by receiving the suggestion from the brokers themselves, you can be more certain they know the actual performance of the trader as opposed to a signal provider who advertises their services on social media.
In most cases, your Forex broker will provide you with a list of trading signals right on your trading platform as we saw above, but in other cases you will have to find them on the broker’s website.
Reputable Forex forums
The MQL5 community hosts the largest number of retail Forex traders and provides information about various Forex topics including trading signals. There are other such forums online, but the feedback from the members should be your priority. Do not be afraid to enquire about any issue on your mind, and pay close attention to the comments section to know other traders’ experience with the signal provider.
Now that you know what to look for in a trading signal, here is a video illustrating in detail how you can subscribe to one, or more: