Choosing the right trading signal provider can be very tricky at times. Investors are given a ton of financial indicators and metrics, however, part of this information can be hard to grasp. Moreover, there is another part of data that does not bring significant value when analyzing such trading signals. How to determine what is important and what's not? Our team has picked 4, from our perspective, most important signal attributes that should be focused on when deciding whether a signal should be copied.

  1. Growth/drawdown ratio:

There is no other indicator as valuable as growth/drawdown ratio. This ratio shows how much trading is bringing in for each % at risk. Effectively, the value of this ratio should increase as time progresses, assuming that a signal remains profitable. Why? - very easy - growth accumulates over time, while drawdown does not. In such a case, there is huge chance that signals with longer history will have greater ratio, making this indicator biased. In order to prevent that, we need to compare growth/drawdown values for similar periods and then decide which of the signals suits our interests the most.

Look at this graph:

Let's say an investor has an opportunity to choose between 3 signals - B, C and D. When comparing all of them, a single time period is being chosen; in this time period, each of the 3 signals have produced their own growth and have reached their own maximum drawdown. The performance of these signals is depicted as single points (B/C/D), as each of these points shows unique growth/drawdown combination that has been reached. Unfortunately, these points show very limited amount of information (as most of available financial indicators) - all we see is that signal B had the highest growth, while signal D had the lowest drawdown. In order to trully understand, which of these signals is our favourite, we should draw lines that would connect these points with the starting coordinates of the graph.

By plotting these lines, we can clearly see that the D line is the most steepest. Why does it matter? - in this situation, the steeper the line, the higher the return for each % at risk. Look at the graph - with the same level of drawdown, growth value will be the highest at D line, while the lowest at C line. It turns out that D signal offers us the best return for the general level of risk we are willing to take on. But wait:

There might be some of You who look at the signal D and are not thrilled with the absolute level of growth - signal B still has that larger. This is the place, where ~60% of all investors are wrong -> You are the one who defines the absolute level of growth&risk You are willing to take on. Point D shows the signal provider's chosen absolute values, however, You can change them by deciding how aggressively You want to copy this particular signal provider. Based on Your risk appetite, Your trading volume per balance can be higher or lower than the signal providers, resulting in higher or lower combination of growth/drawdown. In the end, You can have the same return as in point B, however, Your risk will be significantly lower due to more efficient trading.

With growth/drawdown ratio, it's all about trading efficiency; unfortunately, this ratio as well can be manipulated. That's why we need to look at second important attribute of a signal:

2.  Having a full track record of ALL the history, especially, drawdown:

There are signal service platforms, like MQL5, in which drawdown is being measured only after a signal is being published. What's a problem in that, You may ask? - remember, at the very beginning, I told You - drawdown does not accumulate while growth actually does. This creates an incentive for signal providers to make huge gambles "offline", accumulate quite a growth without any visible drawdown, and only then offer their services in public. Statistically, such signals look amazing, however, there are many existing and potential problems:

  • Growth/drawdown ratio for the period of being "offline" is significantly overrated, thus, unreliable;
  • Signal with thousands % of growth and only a few % of drawdown cannot keep up the expectations - 1 of 2 things will happen:

a) if a signal tries to maintain the same level of growth, drawdown will increase inevitably, leading to horrible ending; if Your DD in the past has been above 70-80%, what's the chance You will survive the next 1-2 times when this happens?

b) if a signal tries to maintain the same level of visible drawdown, it's growth will significantly suffer, his subscribers will not be satisfied, and sooner than later the signal will overrisk or overtrade, ending in the same manner as in a) case.

In both cases, a signal will try to live up to it's unrealisticly high expectations, ending in disaster.

Here is a clear example:

This guy has 32 followers with total amount of 100k - fuck them, obviously. 6000% growth with only 6% of risk - this guy must be a genious, absolute God. As You can see, this signal has been published just recently, thus, it has already managed to accumulate a ton of growth while not displaying its drawdown publicly. And hey - it has helpped him, as he earns as much as 1500 USD per month. Manipulation at its very best. (y)

There is a group of traders who manipulate their past performance this way, however, they have all 1 thing in common - low account balances and low trading size:

3. Sufficiently large trading balance:

In order to achieve 000's of growth percentage in short amount of time, there must be situation (most probably, quite few of them) when trading drawdown reaches sky. Luckily for them, these traders don't hesitate to make these gambles, when there are only a few tens of USD on the line. As accounts grow larger, their risk appetite becomes smaller and they are ready to finish of this manipulation cycle by making their "artwork" public.

Without going into much details with this (as this is rather clear point), You should ask Yourselves - if a signal provider is so confident in his services, why is he willing to risk just so much and not more? He is obviously outperforming the market, so what's the problem? Short everything You have (money, belongings, even children) and invest in this Godly trading strategy.:) For fk sake, it's Joker (lol, just an example), how can it be wrong?

4. Absolute level of risk:

Once again, growth accumulates, while drawdown does not. From the previous example, are those 6000% in growth unrealistic? - Well, it depends from the speed, at which this growth is being reached. Throughout 3-5 years such accumulated growth would be reasonable, but in less than a year? - Not with proper risk management.

In order to reach 6000% growth in 3 years, monthly growth should be 27%; in 4 years - 20%; in 5 years - 16%. Are these % so unrealistic, especially knowing that this is forex market we are talking about? Most probably, 27% and 20% are; 16% per month is quite realistic, having reasonable risk %.

Accumulating effect can have tremendous influence over the total growth; let me remind You, this is why signals with longer positive history have much greater growth/drawdown values. We, as investors, should know this by heart, however, it is important that our signal provider knows this as well.

Yes, I did tell You we can always manually intervene and decide upon our risk appetite, thus, protect ourselves from provider's stupidity and over-agression. Unfortunately, even when being protected on our end, You must ask Yourself how long will such service survive. It can have drawdown of 30%, maybe 40%, time-to-time, however, if it happens periodically, month after month, sooner than later such signal will blow up. It's not so much about loosing money - it's about building long-lasting relationships with provider's subscriber base.

That's all from our side. If You have any suggestions or You disagree with some of the ideas, feel free to leave Your comment below!

Best of luck,

FX Sumo