Are forex signals useful in making profits?
This question originally appeared on Quora
This great question has done a remarkable job at baiting scam-artists. Whoever answered “Yes”, followed by a link to some website is a scam-artist
The one-eyed scam-artist leading the blind
Everyone wants to gain this mysterious esoteric called trading edge. Well, trading edge is not a story, it is a number and here is its formula:
Gain expectancy = Win% * Avg Win% – Loss% * Avg Loss%
Tattoo it where you can be reminded throughout the day (Tramp stamp on your better-half is probably off limit). There are two modules to any trading strategy:
- Signals: exits first, last and very very very least entries
- Money management: position sizing
The scam artists who answered yes, referred to hereafter as Yes-men will provide dummy statistics about entries but conveniently forget everything thereafter. Entry is easy. You can buy a boat, a sports car, a vacation home any day of the week. Good luck reselling it. Bad entry can be salvaged, bad exits can’t.
Then comes position sizing. Signals conveniently omit position sizing for a good reason. It is a function of win rate and stop loss, both of which are either omitted or optimistically manufactured…
Implicit adoption of a trading system
Now, who does not like to wake up, receive a bunch of signals, pick one or two, send the trades and watch the money roll in? I certainly would love to, except it does not work like that.
Even if signals are thorough enough to encompass all the necessary elements from entry to exit including risk, it still omits the most important: following someone’s signal is adopting her belief system, formalised in a trading system. Example: as a professional short seller, i am naturally risk-adverse (prudent position sizing) but disciplined (take the trade, follow the system). This philosophical tenet transpires in my algorithms. This may not jive with someone who likes big high conviction bets.
Even supposedly objective systems such as deMark have several subjective degrees of freedom. The best example comes from the Market Wizards series. Those wizards have completely different strategies that sometimes seem to contradict each other. Yet, they are profitable because they have a system that suits their personality. When You follow someone else’s system, remember that you half-heartedly embrace someone else’s personality without fully understanding it.
How to spot a scam artist?
First, those who answered Yes and attached a link are scam artists. Coming out was not so tough after all, was it?
Second, here are classic red flags:
- No real money live track record = SCAM: Myfxbook provides live track record, so no excuse
- Entries only: no exit, no stop loss, no risk, no stats means SCAM
- Rosy stats: 70%+ win rate means SCAM. We all want to follow a system that is right 100% but the reality is the best traders LT average win rate is around is largely below 50%
- easy money: no you will not turn $500 into $2,000,000 in 2 years. Veteran pros with decades of experience dream of achieving 20% per annum. Scam artists who promise you can achieve 100% returns= SCAM
Basic rule of thumb: we are in finance, assume everyone is a scam artist until proven wrong. Good news, You can cross a few names off the list
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