Forex Trading Signals Providers in 2020
The market is filled with forex trading signals providers. You may find them online, on Facebook, Twitter, WhatsApp and even on Instagram, all offering different types of trading strategies and styles in the Forex market. In this article we will clarify how to recognize a trading signal provider that suits your needs and expectations.
Documented Forex Signals Performance
This is your only mean to evaluate the trading signal provider’s performance. A track record enables the trader to assess the potential Return on Investment (ROI) from following the signal provider. A track record must consist the past trading signals and their outcome, profit or loss.
As we are living in an era where virtually anything can be forged including trading performances the signal provider must take additional steps to reassure the authenticity of its signals’ performance.
What we do at DDMarkets is provide the trading strategy with the trade alert and the chart we used for the analysis. When we issue an update on the trade we include the current chart of the currency pair. All our trade alerts are documented since May 2014 on this website and can be reviewed and assessed by all traders.
We are among the minority that adopt such measures to concrete the authenticity of our performance. If the trading signal provider does not provide a track record, which is often the case in Whatsapp and Instagram there are no means of determining the success of the trading signal provider, which may be problematic to some.
Risk Reward and Drawdown
Assuming a track record has been provided and it satisfies your expectations, the risk reward and drawdown must be closely observed. Risk reward is the size of the stop loss order versus the take profit order. An example of a poor risk reward ratio is a 90 pips stop versus a 30 pips take profit. The reason why this is such a poor risk reward ratio is because even if the signal provider achieves a 75% success rate the profit would be zero.
Lets take 100 trading signals. 75 trades reached the take profit (30 pips) and 25 trades triggered the stop loss order (90 pips). This what the profit would be:
75 (number of successful trades) x 30 (take profit in pips) = +2,250 pips
25 (number of unsuccessful trades) x 90 (stop loss in pips) = -2,250
The net profit equals to zero.
If such risk reward ratio is taken in the Forex market it may be extremely difficult to produce a high ROI. The risk reward ratio therefore plays an important role in following trading signals.
At DDMarkets we outline the risk ratio for each trade alert and strive for 1 : 3, which means the take profit is three times the size of the stop loss order (30 pips stop loss and a 90 pips take profit for the example). This risk ratio means that we require less than 50% success in order to generate a high ROI in the market.
The drawdown and currency exposure are also an important important factor. Assuming the signal provider maintains a healthy risk reward ratio the number of trades that are open at the same time must be monitored including the currency exposure.
Lets say the forex signal provider issued 4 trading signals, each with a 40 pips stop (for example). All the trades are open and hold an average loss of -20 pips, which brings the total to -80 pips (20 pips loss on each signal). If the signal provider continues to issue signals and ignoring the open trades the potential drawdown increases substantially.
What will happen if four more signals are issued and they are also in loss? Monitoring the number of open trades at the same time is therefore extremely important. If a track record is provided with the date and time the signals were issued and when they were closed you may easily determine the potential drawdown should you decide to follow the signals.
At DDMarkets we pay unusual attention to the number of open trades and their status. There were times we refrained from providing new trade alerts in order to ensure a low drawdown, which is part of the risk management we conduct for the trade alerts we provide.
The currency exposure is when the signal provider issues multiple signals on the same currency. For example, 4 signals on long EURUSD, long EURGBP, long EURJPY and long EURAUD means the currency exposure to the Euro (EUR) is extremely high. It will take one technical or fundamental event to force a loss on all the trades. Having such high currency exposure as we described may easily lead to heavy and consecutive losses in the Forex market.
At DDMarkets we monitor our currency exposure and ensure it is well-balanced to minimize the possibility of incurring heavy losses, which is again part of the risk management we are conducting with our trade alerts.
Intraday Signals: Pros and Cons
The time frames the signals are based on is crucial even if the signal provider uses entry orders such as buy stop or sell limit. If signals are based on short time frames (forex charts) such as 5 minute, 15 minutes, 30 minutes and some times even 60 minutes the trader must immediately act upon receiving the signal.
If the signal is at market price and is issued when the market is volatile such as in the European and US sessions, the entry price is more than likely to have changed. The odds of the trader receiving the same or even close entry as the signal are relatively low.
If entry orders are used based it is essential to calculate the distance from the current market price to the entry order. The reason for that is because most forex brokers have am minimum distance that is required from the market to the entry order. It varies from broker to broker so we cannot provide an estimate for this market distance.
If the entry order is less than 20 pips from the market a sudden price movement may prevent you from placing the entry order due to trading restrictions that are set by your broker.
Assuming you do not have this difficulty, if the entry order is based on intraday time frames the trade must be constantly monitored, which is the next subject. We should highlight that in DDMarkets the usage of entry orders is extremely rare as we prefer executing our trades at market price.
Intraday Signals: Constant Updates
When a trade is executed based on the 5 minutes chart (for example) it is required to be monitored every 5 minutes. If the trade is executed based on the 15 minutes chart the trade must be monitored every 15 minutes and so on. The reason for that is because adjustments are likely to be required when the candlestick closes.
If it’s a 5 minutes chart there is a new candlestick every 5 minutes,. In a 15 minutes chart there is a new candlestick every 15 minutes and so on. Most technical indicators change when the candlestick closes. If price action strategies are used adjustments are often made based on the candlestick that closes.
This means the forex signal provider must be committed to the signals that were issued and constantly update the traders that use the service to adjust the stop loss and take profit orders based on the new market conditions.
Some signal providers prefer to distance themselves from monitoring the market and opt for a technical shortcut. The size of the stop loss order is increased although it is not required and multiple targets are provided such as take profit `1, take profit 2, take profit 3, take profit 4 and take profit 5. It is then up to the trader to manage the trade and determine the take profit based on the new market conditions.
Many traders are not suitable for this as it requires great trading experience and skill. The inexperienced traders are likely to entangle themselves in the trade that on most occasions does not end well. Assuming the signal provider takes the job on itself to monitor the market and issue updates when required, as these are intraday signals multiple adjustments may be needed.
You must ask yourself whether you have the required time to act when an update is received.
In DDMarkets the global trade alerts are based on either the daily, weekly or monthly charts and are issued around the daily close (21:00 GMT). If we use a 4hr entry it is derived from the daily chart. With that said, there were very few occasions in which we used the hourly chart and issue a trade alert during the European session.
This was only done if the hourly chart produces a strong signal. One of these examples was on 14 April, 2015 in Euro Dollar. As the global trade alerts are based on the daily, weekly or monthly charts the trade alert contains within itself the intraday noise.
We do have a relatively new plan where we provide intraday strategies based on the 4hr chart, designed for intraday traders. Unlike the global trade alerts we provide the raw strategy without the customary entry, stop loss and take profit. We provide a target and clarify the logic behind our strategy and allow the trader to manage his or her positions on their own. It is designed for experienced traders.
You are welcome to review the intraday strategies in the following section. Please note that recent strategies and trade alerts can only be accessed by traders have signed up for the relevant plan. Both the trade alerts and intraday strategies are manually researched in DDMarkets and are not automated in any means.
The Stop Loss and Multiple Take Profits
While some experienced traders will be amused by this many inexperienced traders are completely oblivious to the stop loss and take profit orders. As we explained in our ‘how to set a stop loss in the market’ (which also applies for take profit orders), if technical analysis is used the stop loss and take profit orders are derived from the chart. One does not set a stop or take profit based on his or her mood on the day.
If the signal provider is using a fixed stop loss order and a fixed take profit it may indicate the location of the stop loss and take profit orders have no technical ground to support them, which is wrong and may raise some doubts regarding its proficiency in the market.
This step requires some trading experience. Most traders are locating the stop and take profit orders based on support and resistance levels. All you need to do is draw a horizontal line on chart the signal was derived from where the stop loss and take profit are suggested.
If the signal provider uses technical analysis you should note the stop loss order are placed near support levels while the take profit orders are placed near resistance levels. If you are unable to recognize any support levels near the stop loss or resistance levels near the take profit that should raise an alarm and you may wish to request the signal provider to clarify the location of the stop and take profit orders.
In DDMarkets we are very transparent in our trade alerts. As we provide the chart for each trade alert we will also clarify the location of the stop and take profit on the charts we provide. Naturally, the stop loss and take profit orders vary from trade to trade but we we ensure a healthy risk reward ratio is maintained.
If the risk reward ratio is not maintained we refrain from issuing the trade even if we have a technical entry in the market. You may read more details on our global trade alerts in our latest trading guide.
We hope that you are now aware how to analyse trading signal providers in the Forex market and determine which service is best suited for you.