Forex Signals Due Diligence

Forex signals are a great way of making money with very little effort. On the other hand, you shouldn’t be looking to save time when actually selecting a forex signal. Taking the time to find a solid, consistent signal with a proven track record will almost certainly save you from nasty surprises and heart (wallet) ache down the track.

In this piece we will discuss a few things every trader should do before running a forex signal on their live account.

Take an indepth look at the signal’s trading performance

This sounds like a no brainer, but some traders will just look at a signal’s total profit and jump right in. As well as total profit, you should be looking at average annual profit, drawdown and it’s relationship to annual profit, worst losing months etc. You should also make sure the signal isn’t being run on a “cent” account, if the trader you are following is only risking $5 of their own money, do you really want to put the safety of your account in their hands.

Familiarize yourself with the strategy behind the signal

Understanding the strategy that powers a forex signal is really important when assessing whether or not it is a good signal. For example the signal may appear to only lose 2% of its trades, but a closer look will nearly always reveal the trade is trading with incredibly wide stops or no stops at all. This style of trading is simply not sustainable, eventually, something goes wrong.

Taking a look at the win rate, risk:reward ratio, stop loss and take profit levels can provide you valuable insights into the strategy behind a forex signal.

Is the signal’s track record statistically significant?

Even if the performance metrics we mentioned earlier are perfect and the strategy appears to be safe, none of this matters if the sample size is too small and the track record is too short. At the very minimum, a system needs at least one year and the market and 100 trades for its performance statistics to mean anything. Generally speaking, you can’t put too much weight in past performance until a system has been live for 2 years and has at least 200 trades. Here at Vantage FX we’ve seen lots of traders do really well for a short period of time, only to blow up their MT4 account a month down the track after doing something stupid.

Track record and consistency is everything in this game.

See if the signal offers a free trial

If a forex signal is as good as it looks, the provider or platform will usually offer some sort of free trial. The exception here might be longer term strategies where signal quality can’t accurately be assessed over a short free trial period. Even if there is no free trial period, most providers will offer some sort of money back guarantee if your account’s performance does not match theirs. Do your research and shop around, a good signal provider will not be afraid to back their product.

Run the signal on a free forex demo account

Before taking a forex signal anywhere near a live account, you need to run it on a demo account. Some signals like the ones built into MT4 and MT5 allow you to set your own risk and may not exactly replicate a strategy’s money management strategy. If you are going to make a mistake related to position sizing and risk, you want to be making that mistake on a demo account. If you accidentally set risk to 10x what it should be, you could blow an account on the first trade. Why risk it?

Another good reason to run the strategy on a demo account first is to truly understand how it works, no matter how much effort you put into analyzing the trading strategy through past trade stats, you are never going to understand the strategy completely until you see it in action. Get to know the strategy on a demo account before taking it live. Understanding the trading strategy will allow you to run it confidently without interference once you do deploy it live.

Vantage FX offers free ECN forex demo accounts for both the MT4 and MT5 platforms, there is no excuse to not test your signal in a safe environment before deploying it live.

Not just set and forget

Though forex signals greatly reduce the amount of time and effort usually required for successful trading, they do not eliminate this need entirely. You should check on your forex signal account regularly and make sure everything’s running smoothly. It is also a good idea to monitor how the signal is performing now and whether this fits in with what you saw in the historical performance. Be wary if trade sizes suddenly increase or if the trader starts exhibiting signs of loss aversion when something goes wrong.

Use the Correct signal service and trade with care.

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