Why you must not trade with signals.

Sara Waqar Forex

l services are services offered by brokers, traders or fund managers to newbie or more inexperienced traders in which a potentially profitable trading opportunity is identified as an easily executable trade call.

Example:

You subscribe to an automated trading service for $100 a month that generates 10 trading signals every day, 5 in the morning and 5 in the evening (much like medication pills for a heart patient). A trade call reads like:

Sell GBP/USD at 1.4627 with SL 1.4695 and TP 1.4522

Seems so easy to make money with a signal, doesn’t it? Don’t fall into this trap. Here are some crucial reasons why you should steer clear of all types of trading signals, whether subscribed or coming for free from a broker, signal provider, trading robot or even a friend over whatsaap.

  1. Signals will cripple your trading prowess and give you a false sense of guidance: While receiving signals may put you in a comfort zone, make you feel more secure, ‘guided’ and less lonely in your trading environment, beware that these feelings are spurious, temporary and misleading, and will lead you to rely less on your critical thinking and discretionary capabilities that have no other substitute when it comes to identifying a high probability trade set-up. As you aim to justify and ‘squeeze’ these signals into your strategy and trading discipline, you will undermine both and find yourself in a state of confusion and over trading. The end result for the trader is to usually have lost confidence in both their original trading skills as well as the signals.
  2. The claims of highly profitable signaling service: Some signal providers will market their services as having a 70% or 80% success rate and backtesting may prove their claim. This is nothing but a marketing gimmick put in place to increase subscription sales. You need to be wary as most signal providers will provide you with only the correctly worked out trades to backtest their results. Also, signal providers usually do not give the same signals to all their clients at the same time. Rather, they diversify their market risk by giving for example, bullish signals on the dollar to some clients and bearish to others simultaneously.
  3. A profitable signaling service will never make you profitable: Even when a signaling service is more than 50% correct, chances are that you still fail to grow your trading account. To make a signaling service translate into profits is the real skill and is entirely in your own hands. The art of trade execution is all about mental discipline and emotional control, which in turn determine the extent to which you are able to follow risk allocation and risk/reward management principles, along with your basic strategy. Having access to a ‘correct’ trade’s anatomy i.e entry, take profit and stop loss does not determine your reaction to its execution  and any subsequent interventions at any point in time.
  4. People with the same signaling service produce vastly different results: Different people will react very differently in executing a trade with a pre-determined anatomy depending on their perceptions, skill and experience, all of which are very psychological in nature. As an example, suppose that a signal does play out but a person not having exited at the suggested TP in the hopes of more profits, may find himself continually hoping that the signal would play out again despite market reversal (as the pain from losing out on the ‘correct signal’ is too much to bear). This way he can end up with a loss on a ‘correct’ signal, and moreover a sizeable loss if the stop loss is removed in a state of desperation and hopelessness. Signals will never teach you the correct mindset and emotional control that is required for successful risk management and trading. Without it, a single wrong signal is enough to wipe out your entire account.
  5. The market value of a signaling service: If a signaling service is being sold under the guise of consistent high monthly profits , one must reflect on the inherent market value of such a service, assuming such claims are true. According to the law of prices in Economics, the value of a commodity or service should reflect its true/inherent/fundamental value over time as information disseminates and economic agents continue to act rationally. Does a $10 a month signals subscription (or even $100 or $500) ring any bells? Is it reasonable to expect to make thousands of dollars from a service that is itself worth 10 or 100 bucks?
  6. People or companies who provide signals aren’t usually traders themselves: What does it require to make or generate a signal? The answer is: virtually nothing. Technically speaking, even a newbie can come up with a 100 signals in a day. Any trading system can be programmed to generate an infinite amount of signals on a daily basis. Has one any way of telling how these signals are actually generated? Or whether they are in any way derived from some ‘comprehensive or elaborate’ analysis of economic or technical factors? If so, how so?

Unfortunately, the aim of most signal providers and brokers is to maximize their revenue through subscription fees and/or commission revenues that keep building up as your fingers dance and click on the trading platform every time a fresh set of signal arrives. At that time, it’s excruciatingly hard to hold one’s self back, mostly due to the perceived fear of missing out on opportunity and profits; a psychology which the provider well understands. Of course, this is very lucrative in terms of commissions generated for the broker who makes sure that with this arrangement the trader does not become too ‘passive’. All in all, signals serve all parties very well; all except you.

There is no substitute for patience, emotional control and human discretion exercised with skill that is the real recipe of successful trading. Relying on what looks like an easy short-cut is often very expensive in trading.