Article: Why you should never buy trading signals (unless you understand the method’s rationale)

signal_serviceWhen you start trading, earlier or later, you come across websites or ‘experts’ who offer to provide you with signals you can trade. That happens mostly in Forex, but also in Stocks and Futures. The service provider often promises to use “proprietary algorithms” which generate “highly correct and detailed” entry and exit points. Some of these services, like a robots working on the forex market, promise staggering returns, up to $50.000 /month! And, of course, such high returns justify, very often, also high charges for the signal service. Mostly these services charge a monthly/annual fee between 39 $ to 500 $ (!) or more dollars!

Of course, the proposition looks tempting. Technical analysis is something that must be learned anyway, so why not leave this to computers and their algorithms and just grab the money those signals promise you? If that were true then everyone with an interest in trading would be a successful trader. The reality is very different and statistics in the trading business say that 3% to 5% of participant make money consistently, i.e. have regular lunch on the savings of the remaining 95%.  I believe there are some very good reasons why you should never buy any signal services, unless you understand the method’s rationale and have all the tools made available to be able to execute the trades regularly, properly and consistently.

Hereunder is a non-exhaustive list of reasons you should carefully consider:

a) you will always be late and lagging behind the original trade. Even if the signal providers sent out a message to you via email or flashed it on your browser in real time when the setup is actually triggered, you would always need some time to react and be able to duplicate the trade. Since the markets can move very quickly, you often will have no chance to take the trade or, at least, not with the initial risk parameters. Only a small move into one direction (be it a stock, futures or forex pair) can change the risk/reward ratio dramatically, especially if significant leverage is used. So try to focus on methods and systems that are based on the study of price structure. These methods will often provide and explain trading plans well in advance (sometimes hours or even days) and uncover healthy market price structure – that can lead to continuation of trends – only if price actually triggers the trading plan, i.e. reaches the entry price and gets a fill.

b) the provider normally does not disclose the system behind the signals. Of course not, isn’t this his business secret? So you are not able to understand the rationale behind the proposed trade. But convince yourself that this is a definitive MUST to succeed as a trader! You must know the basics of support and resistance, of trend, some basic chart patterns or the typical behavior of those players who deeply influence price like, for instance, Program Trading. Only then can you check whether the signal makes sense or not. And if you are able to check that, it means that you are experienced and so you are already able to trade your own system. Some services – probably the best ones –  provide some sort of educational content and psychological support to help you not only take the trades, but especially to help you stick to the related trading plans once you are involved in the markets, until the target price or stop is reached. Some services are indeed so innovative because they don’t use traditional TA but other working concepts that allow to quickly discover price structure. In such cases, understanding the basics of the system is paramount.

c) common people do not trust anyone in the street with their money. For instance would you trust someone you don’t know with $250, asking to take the money and invest it so tomorrow $500 would be returned back? Of course people would never do something like that. It is important to understand – and that’s the rationale behind learning to trade – that the only one who is responsible for his/her own money its “YOU”. Responsibility is not something traders can delegate (and luckily so!). You alone decide under which circumstances you take a trade or leave it. Never blame someone else for your losses! Take responsibility for your actions! That’s the only way to become a successful trader. Which translates into another statement: it takes hard work to become a successful trader and only if you really desire it you have a chance to make it into the elite five percent! The good news is that anybody can do it, depends on how much he or she badly wants it! Of course, not all people have time to learn trading and there are still people who want to be able to generate income from trading or what to “earn while learning”. Make sure you find a signal provider taking the time and showing the willingness to explain why the signals work and then offering the additional psychological and risk management support to really allow proper execution by subscribers.

d) finally, think of all the money spent for a signal service. Let’s assume there is a service charging 50 $/month. This makes 600 $ per year. If as a beginner a trading account probably is no higher than 10,000$, only to earn back the fees for the signal provider a trader would have to make an annual return of 6%! Believe me many professional fund managers would be happy to realize such a gain on a permanent basis. And this only to cover the cost of the service fee, not to mention additional costs for slippage, data feeds, transaction costs, taxation and so on. To really make money you would need a annual return of, at least, 10% or even 20%. Of course there is always the other side of the coin. Should a $10,000 initial capital be considered proper capitalization? I think good capitalization starts at $50,000, which would bring the costs of a $50 signal down to about 1%, a reasonable cost.

So my advice is: save the money for signal services. Unless the signals provider does explain the rational of those signals, gives tools for proper execution of related trades – including psychological support and money/risk management, use that money to learn to trade by yourself!

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5 Comments

Filed under Articles, English language, Newsletter, Trading Method, Weekly review

5 responses to “Article: Why you should never buy trading signals (unless you understand the method’s rationale)

  1. Unfortunately, this advise is something that has to be learned the hard way as well.

    • Maybe it is true. Trading is all about beliefs. You change them as you go along. Some beliefs are about the technicality of playing the markets. Other beliefs, and particularly, the one being challenged here, is about how you with trading as a business. Anyway, better to be warned and advised than being not. At least one has that ‘warning signal’ somewhere in his/her own mind…

  2. dan c

    Hey.. Stefano.. U bldy 1000% rite.. do the hard yards and stop looking for short cuts.. develop your own style.. we all have diffrent personalitys i=and in my opnion this reflects out style..regardless of method

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