Following Forex Trading Signals Is Dangerous To Your Wealth

By | November 15, 2015

I’m not going to refer in this article to obvious scams, like those robots attached to fake track-records at dubious brokers (Synergy FX for instance). What I’d like to point out is that even the signal sellers who, for all we know, act in good faith, are in 99% (there’s that saying, ‘never say never’) of cases just accidents waiting to happen.

The first thing that should be kept in mind is one major flaw of this business model –  the interests of the signals seller and those of the person who copies them are not aligned. When the signal seller makes money based on the volumes traded by his followers and not based on a percentage of the actual profits he made for them, you know there’s going to be trouble ahead.

The other major problem, not as obvious as the first one, is that the average investor doesn’t have the time or the know-how required to properly analyze the track-records and the statistics on sites like Myfxbook. Most people will look just at gain/draw-down and the higher the ratio, the more attractive the system will appear.

Well, there are many funny sayings about statistics, such as: ‘there are lies, damned lies and statistics’ or ‘statistics are like bikinis; what they reveal is suggestive, but what they conceal is vital’.

That’s the very case with the gain/draw-down statistic. It reveals that up to the present time the strategy has made money. But because it’s backward looking and limited, it conceals the vital part, how the strategy is likely to do in the future. To give you an example: let’s assume a crazy person plays Russian roulette (where you load one bullet into one chamber of a revolver, spin the cylinder and then shoot at your head) and survives the first 8 rounds. Would you call this low risk ? Just seeing a gain/draw-down chart for this activity, it would appear so. But if you actually look beyond that and see what the guy is doing, you’ll instantly realize both how misleading the statistic is and that you can’t put your money on this guy.

In order to find out who is playing financial Russian roulette (unaware perhaps), you need to know the Value at Risk (VaR), which is a risk measure that takes into account the frequency, leverage and duration of individual trades and also the market conditions (like volatility and correlation between pairs). For the time being, in the retail space, only Darwinex calculates VaR  and they also standardize all investable strategies (called DARWINs) for 20% VaR. For those interested in this important topic, here is a webinar addressing Value at Risk in more detail.

And now I’ll give you an example of  the hidden danger I mentioned above. This signal provider is ranked high (no.7) by Myfxbook in their auto trade systems feature. I chose him on the following additional criteria:

  • manual trader (all other things being equal, I believe a one year track record of a human is more honest than that of an EA. At least it shows there’s some work put in there, to watch the market, enter and close the trades. With an EA, it feels like analyzing the winning lottery ticket – the developer might have bought/developed 20 EAs a year ago and just got lucky with one.
  •  the history is shown
  • there’s at least 1 year of trading
  • no gaming of the gain/absolute gain system
  • I got intrigued by a name such as SPM Capital Management :)

With a 96% return for the past 12 months and a draw-down of only 14.5%, what’s not to like ? I looked up the name and found him on this forum. Seeing how this guy talks was the first sign that he might just be a lucky survivor of a year’s worth of playing Russian roulette:

In the last 12 months I have almost doubled the account, and in the next 12 months I intend to triple it. – post no.7

Digging more deeply into the track-record what do we notice ? Open trades are a mess – 17 trades with no stop loss and several being just averaging down. Going through the history, the same tendency to avoid closing losing trades and instead wait for the price to come back is evident. So far he has been able do dodge the bullet, but this by no means implies safety going forward.

To conclude: I strongly believe that following/copying forex signals is a money losing proposition in the medium and long term. In the short term, it’s a coin toss at best.

19 thoughts on “Following Forex Trading Signals Is Dangerous To Your Wealth

    1. JLTrader Post author

      That just goes to show he doesn’t understand risk. No big surprise, as even people with Nobel prizes under their belt had problems with that – and the result was the blow-up of Long Term Capital Management fund. It had gone from strength to strength for some 4 years before busting in a month or so.

      In SPM case, as he doesn’t use SLs and averages down all it takes is for a strong move against him to do serious damage.

      Here’s an article I wrote some time ago that addresses this topic: http://www.financemagnates.com/forex/bloggers/pitfalls-in-measuring-risks-when-trading-the-markets/

      Reply
  1. Frank

    JL Trader you full of BS.

    You may be a good writer, but you truly are a terrible trader.

    Reply
  2. Frank

    You are the lowest of the low.

    From your terrible track record:

    https://www.darwinex.com/en/user/JLTrader/summary/CKU.3/

    You may be a great blogger, earning money from referrals from your BS site. However your track record shows you cant trade.

    SPM has been providing consistent gains for well over a year with only one losing month, and had a track record back to 2014. I hate guys like you who just cant stand seeing someone else being successful, and trying to gain by bad mouthing someone else.

    Who would want you to mentor them when you have no experience of trading. Even the best economists make the worst traders- so why would a low level blogger like you expect to succeed on the back of attacking another trader?

    Reply
    1. JLTrader Post author

      You’re obviously either the guy behind SPM trolling me or just a retarded person who can’t comprehend what I’ve written here and in the Finance Magnates article. Don’t bother replying, I won’t approve any more comments from you.

      Reply
      1. Andreas

        How about freedom of speech Vlad ? I thought you were big on that one

        Reply
        1. JLTrader Post author

          Yes, I’m all for that, I’m not automatically blocking/deleting comments that criticize me. But I won’t be drawn into a debate with disingenuous persons that instead of using arguments, insult me and other readers that have minimal intelligence. In this case:
          – I’m the lowest of the low ? you don’t say
          – terrible track-record ? I’m down 5% in a month and a half – how is that terrible ?
          – my site is BS ? Why ?
          This is similar to a guy coming into your house, swearing at you and taking a dump in the middle of the living room. Would you allow him to enter your house next time ? :)

          Reply
    1. beemak

      As the eur.usd keeps rising, this spm guy keeps adding shorts. In this manner he’ll be broker by the time eur.usd reaches 1.15. This is obviously an inexperienced trader who’s got lucky so far and you’re a moron for not seeing this and trolling jltrader

      Reply
  3. Markos

    Please please please no more articles. Very good journalism does not make a very good trader.

    Just trade for one year and show me your profitable performance.

    I doubt you will make 6 months without blowing your account.. Haha

    Reply
  4. Markos

    Please show us your track record before trying to sell us your ‘education’ JL.

    Where is your trading performance?

    Reply
  5. Christopher

    thought I’d read this post and comments due to the new post today.

    It’s sad in a way but very very funny and entertaining reading all the comments.

    Let me just say that anyone who trades without actually placing a stop loss (a 300 pip pretend stop doesn’t count :) ) or thinks it’s ok to trade like that if you have a high performance is clearly a rookie trader. Even if someone had a 1000% return for the year but averaged down and had no stop, I would still run as far away from that person as possible.

    Everyone wants to be like a big fund trader managing a 100million dollar account but let me ask you, would a 100m fund trader have no stops? Let’s say you had 100m of your own money, or even 1mil, would you trade that account with no stop? No you wouldn’t, it’s just silly. The point is, if you want to one day be a pro trader with a big account you have to trade and think like a pro before you actually get there. You can’t just fluke it. If you wouldn’t do it with a million dollars than you shouldn’t do it with $10.

    If you want to blow up your account in hope of making a quick buck then renounce all reason and logic and chase the million dollar no stop loss account :)

    Ahahaha young kids these days, crack me up.

    Reply
  6. Jake

    Where is everyone now? JL was spot on with this! Spot on! I would take JL´s tiny DD anytime over that cowboy trading from SPM.

    Reply
  7. Frank

    I see SPM is back above equity highs? SPM Capital management is an amazing trader.

    Reply

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