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How to Pick a Forex Signal Provider

How to Pick a Forex Signal Provider

What is Forex Trading Signal?

A forex trading signal is specific information about a particular forex pair (EURUSD – USDJPY GBPUSD, etc.). The signal is a recommendation for entering a position on a currency pair, usually at a specific price and time, take profit and stop loss targets. The trading signal can also include extra information like charts, graphs and market analysis. A Forex signal provider is a service, usually on a subscription basis (monthly or yearly), where a provider sends forex trading signals to subscribers to trade on. A good FX signal service does all the research and analysis of the forex pairs trying to find the best trade setups, which are then transmitted in the form of trading signals to their clients. 

Categories of Trading Signal Providers

Foreign exchange signal providers may provide the signals for free, or they may require a weekly, monthly or yearly fee. Signal services use technical analysis to generate forex signals, or fundamental analysis to provide their trading fx signals.

Technical analysis is the analysis of graphs and forex charts, looking at moving averages, candlesticks, flags, areas of support and areas of resistance, and other technical indicators. Technical analysis believe that recent and historical price action as seen on price charts should be the primary means to determine forex future price direction of a forex pair. The most intellectual foreign exchange signal providers have their own prop trading systems that produce these signals based on years of historical testing and quant research.

Foreign exchange signals services that provide forex trading signals based on fundamental analysis rely on the fundamentals of the economy and news reports from FED or ECB such as interest rates, GDP, inflation rates, unemployment rates, and central bank announcements to help them make trading related decisions.

What to Look for When Choosing a Forex Signal Provider

Investors need to pay attention to all details regarding a signal service. So what are the factors to look for when trying to find the best forex signals provider? Here are some tips:

Age of the account

The first thing to look for when choosing a Foreign exchange signals provider is the age of the account. Start searching by looking at signal service providers who have a track record of at least three years. This will tell you the experience of the trader who is managing the signals. It will also show you how consistent the FX signal provider has been in the last three years of trading.

Check for verified trading results and proven track record




A track-record ensures that the claimed performance is real and is good if it is verified by an independent third-party, such as eToro , Myfxbook, FX Blue or ForexFactory etc. Some signal providers publish hypothetical or simulated track-records of their signals, which mean that their signals weren’t traded in the real market. Those records can be different from real track-records, and show that the FX signal provider doesn’t trade his own signals. Another major consideration is whether the signal provider uses a demo account or real account to trade the signals.

Consistent Profits – Signals have to be profitable

Before using any forex signals service, traders need to make sure it has a good track record. The best signals service provider must produce good, consistent trading results. Many signal providers claim to catch up to a few thousand pips per month, but without a verified track-record those numbers shouldn’t be taken seriously. Furthermore, if a provider “guarantees” a fixed amount of pips per month, you should delete that provider from your list. Nobody in this world can guarantee profits, and this is an early warning sign.

Performance

When comparing the performance of Forex signal services, you must look at the pips earned rather than percentage return. The reason for this is that percentage returns can be misleading as different leverage amounts will provide different percentage gain data.

You must check the number of positive pips per transaction and compare them to the number of negative pips per position. Then compare the results to the total win ratio. Also, you should check how many weeks on average a forex service provider has gains against how many weeks it has losses.

An important criterion is to find how many entry positions the forex signal service is offering. Most reliable signal providers will manage to balance the quantity of trading opportunities with the total transaction fees of the forex account. If the FX signal service is providing a big number of signals with arrow profit targets, you have to be cautious, this should be a warning and signals that making profits with that signal provider will be a difficult story.  

Win Rates

Most professional forex signal services will only provide an entry signal that has an advantageous return to risk profile. That is the correct approach to trade the forex pairs. So these investors can make steady profits even with 30%, 40% or 50% win rates. Reliable forex strategy services have a consistent performance record and obviously they are not profitable every month, but in the long term they show consistent positive results.

Traders must also analyze the average risk to reward in conjunction with win rate. There are strategies with 95% win rates that can lose money and there are also strategies with 25% win rates that can make money. It is all relative, so don’t let win rates fool you.

Drawdowns

Drawdown is the high-to-low decline in equity that an investor has in a certain period.  Some investors refuse to take the losses from a position failing to use any stop loss.  The trader keeps open the losing position waiting a reversal in the market.  Turning a negative position into a winner sounds great, but it will destroy your margin and may never turn to gains. 

Some signals look really good because they risk hundreds of pips to only make 5 or 10 pips in profit. This approach works well over a short period, but signals like this nearly always blow up eventually. A successful FX signals service will not only provide excellent returns in terms of portfolio growth but will accomplish this with reasonable drawdowns.

Demo and free trial

How to Pick a Forex Signal Provider

Any reliable signal provider must offer a free or at small fee trial period to test and verify their service. If you can’t get a trial period, most likely the services are not transparent, real and reliable. Try not to use such services. If anyone is confident in what he is doing, he will definitely offer you a demo account first.

Any graphs and analysis sent together with the signals is a great feature as they help in understanding the signals and offer valuable learning material. This learning material can also be used as a great educational resource to learn from, especially if you’re looking to become an independent forex trader. The signal service provider should also have strict risk management guidelines in place and keep you updated on any changes on the trade setup.

Money management

Many forex signal providers actually use a forex penny account. A cent account, as the name implies allows you to trade just in cents. This means that in trading there is very little risk. Copying trades from that kind of account to your real trading account with thousand USD in equity can be a bad investment. Pay attention to the trading equity of the FX signals provider.

Researching and analyzing how the signals service trades (based on their trading record) will give you a lot more insight. The bottom line is that traders need to also focus on the money management strategy of the signals provider and not just how much returns they generate.

Reliability

An important factor to consider also is the software and tools a forex signal service is using. Do they have robust software to send out signal notifications and are they offering different channels for you to receive the trading signals on time? Another factor to check is the details that the forex signals provide. Do the signals always provide profit targets and stop loss figures or do they only provide just entry points but no exit points?

Conclusion

The Forex signal provider first of all has to be profitable and have a verified track record, ideally by a third independent party. Even if the forex signal provider does have verified results, make sure to open first a free forex signals trial account to assess the quality of the signals in real-time trading. You also need to make sure that the type of trades and times at which they are sent out suit your personal trading style and time-zone.

Finally, always do your own research, check online reviews and get a free trial period before you buy any trading signal service.

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