How to Choose the right Forex Signal Provider to Follow

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Are you one of those Forex traders following one or more signal providers and losing money?

It all looks good before you start follow a Forex trader, but then suddenly you receive some trades on your account that float in loss for weeks or months.

Holding trading positions for weeks is not only an expense (if you are charged swap fees each day), but also puts you in mystery as you never know if such trades will ever get to close in profit.

Trust me, I’ve been there and I have spent lots of time to find out a formula which allows me to choose only those trading strategies that have big potential to survive the market and possibly make me money.

We all just want to make money trading Forex, but no matter what you do it all seems so complicated even though it looks simple from the start.

Choosing the right Forex Trader to follow

Mainly there are 5 ranking factors to look at when you’re choosing a trading strategy to follow.

  1. Minimum deposit requirements
  2. Return/Drawdown ratio
  3. For how long their strategy is successful
  4. Are they trading consistently
  5. What’s your possible ROI (Return on Investment)

I know you are probably not very familiar with these parameters, but trust me, it’s not a rocket science. Everyone can learn them and find quite easily for every trading strategy.

Let me explain more about each of these ranking factors and tell you why I am using them.

Minimum deposit requirements

Face it. No matter how well the strategy might look like and how profitable it could be, if you do not have enough money to meet minimum deposit requirements it would be silly to copy that strategy.

In fact, that’s one of the most common mistakes traders do. They find a winning trading strategy which requires minimum $10,000 USD deposit, but instead they start copying it with just $100 USD deposit in their account.

Sure, it could be that your account will survive, but it is more likely that you will lose your account and it will happen fast.

If the strategy uses 1.0 full lot size positions on $10,000 account then it is natural that you would use 0.01 micro lot size positions on your $100 account. In such scenario you are very likely to make profit, even thought it would be 100x times smaller than on the master account.

But if master account use 0.01 micro lot size positions on $10,000 account, then you will not be able to risk 100x times less, because your account size is 100x times smaller. In such case you will definitely lose all the money in your account if you start with $100.

As an example let’s take a position of 0.01 lot size which lost $100 on the master account (this is 1% loss). Such trade would also be copied as 0.01 lot size position on your account, because you cannot usually have smaller lot size than that. But the $100 loss on your $100 account would be 100% loss. In other words – it’s quite obvious that your accounts would be wiped out already but just one position. And remember, even the most successful trading strategies can have several or even dozens of losing trades in a row.

To avoid such problem the “minimum deposit requirements” were invented, so be sure to check them before you copy any trading strategy. In other words, do not copy any strategy if you do not have enough money to do so.

Return/Drawdown Ratio

Return to drawdown ratio is a simple number that can tell a lot about how much money you are risking to lose.

Ret/DD also gives you suggestion on what your initial deposit should be.

To calculate all that you will need to know Ret/DD and Net Profit the strategy made.

Say if the strategy you are following has Ret/DD ratio of 7.22 and Net Profit of $1,122, this simply means that the maximum drawdown in money is 7.22x times smaller than the Net Profit.

$1,122 / 7.22 = $155.40 (max. drawdown in USD).

Do you think it is wise to start trading such strategy with just $100 in your account? Definitely it is not wise to do so. It should be at least several times bigger amount than the maximum drawdown of $155.40.

Usually I calculate minimum deposit amount like this. I take the maximum drawdown value and multiply it by 5x times.

$155.40 x 5 = $777 (suggested minimum deposit).

Many people look at maximum drawdown in percentage, but in my opinion that is not the right way to judge how much money you risk to lose. The reason is simple. Percentage does not tell you exact size of drawdown in terms of money.

For example you see maximum drawdown of 20%. If you start trading with $100 does this mean you may expect drawdown of 20% which would be $20? No, that is not true.

The 20% drawdown might could have occurred for the strategy when it had for example $8,000 deposit. That would be $1,600 for max drawdown. Not what you expected, isn’t it?

And even if master trading account began with initial deposit of $100, we still do not know when did the 20% maximum drawdown occurred exactly. Maybe it happened few months later when the account balance was already at $800. That would be $160 for maximum drawdown.

For how long their strategy is successful

Make sure you also check for how long the strategy you want to follow is already making profits. If the strategy is successful for just a few weeks or less than 3 months I would not consider copying it.

I would wait for the strategy to show consistent profits for at least 3 to 6 months. And if it’s winning for 1 year already or longer then it’s definitely a good sign.

Trust me, it’s very easy to create strategy that makes profit for the first few weeks. Most strategies do not survive the live market for more than 3 months and it’s even difficult to survive 12 months or longer.

Also, total trade number is important here as well. You would want trading strategies that generated at least 100 trades.

Are they trading consistently?

This is something that many beginners do not pay attention to. They just see nice equity curve, max. drawdown figure that’s not too high for them and start copying the strategy immediately.

That’s a mistake you should avoid.

Always check if the profits the strategy generated are consistent. I’ve seen a lot of strategies which report profits for a couple of months, but when you look closed you realize that there were some trades in January and then only few trades in December. Basically other 10 months had no trades at all, but this shows the strategy as it was working for 12 months already.

Pay attention if strategy is trading every month or not. You should know how often you can expect trades to appear in your account when following some trading strategy.

Also, it’s a good idea to know the average trade number per month you can expect.

Say you’ve found a strategy that has generated 252 trades in 14 months. If we divide 252 by 14 we get 18 per month on average.

Important to understand that this does not mean you will get 18 trades per month exactly, it’s just an average number. But if you get say 2 trades per month or 40 trades per month then comparing that to an average number of 18 kind of tell us something has changed in the strategy and results might not be what you expect.

What’s your possible ROI?

Always calculate and try to assume what returns you could expect from your investment. If you are about to copy some trading strategy then you should know their yearly average return.

For example, if trading strategy you want to copy shows yearly average return of 55%, this means you can expect around ~$55 profit if you start with $100. Simple as that.

Obviously it does not guarantee that you’ll get the same returns as trading history shows, but it’s something you can expect for sure if things go well.

Conclusion

There are many ranking factors to evaluate trading strategies and you can use them to make the decision which strategy to follow, but the most common ones that I personally use are minimum deposit requirement, return to drawdown ratio, strategy life time, trading consistency, and also it is important to know what’s your possible ROI.

So what other strategy parameters are you using to evaluate trading systems and why? Share your findings in the comments below.

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