Last Updated on 14 October, 2021 by Samuelsson
The financial market is full of opportunities, but learning how to analyze the markets to find good trading setups is not an easy journey at all. Trading signals seem like a good option, so you are wondering if they worth it
Yes, trading signals are definitely worth your time and money, especially if you don’t have a profitable trading strategy that works. Trading signals enable you to take advantage of the opportunities in the financial markets without analyzing the market yourself, but be sure to choose a trading signal provider that suits your specific situation.
In this post, we will explain what you should know about trading signals, why you may need them, how to choose the most suitable trading signal for you, and what to do to get the best out of trading signals.
What you should know about trading signals
Trading signals are notifications, sent by a signal provider, about trade setups in a variety of financial markets. The signals can be sent via emails, SMS, WhatsApp, Skype, Telegram, or any other messaging app to the subscribers who receive them and trade based on the recommendations in the signals. In this case, the signal is manually executed.
There are also trading signals that are automatically executed within the trading platform such that when the signal provider makes a trade, the trade is replicated in the trading accounts of the subscribers. This is known as copy trading or mirror trading.
A trading signal provider is usually an experienced trader with a solid track record of success. In some cases, trading signal service may be offered by a trading company that specializes in market analysis and trading. Whatever the case, a trading signal can be automated/copied within a trading platform, but if it is delivered via messaging apps, the subscribers have to execute them manually.
A manually executed trading signal would normally contain information about the financial instrument to trade, the entry price, the stop loss price, and the profit target price. There may also be some suggestions about managing the trade, such as when to move the stop loss to breakeven and when to close a part of your trade.
Some signals may recommend a passive trade management approach — the set and forget strategy — in which you set the stop loss and profit target orders and leave the trade until either of them is hit, closing your trade with either the expected profit or the planned small loss.
In addition to all those, some signal providers may also attach charts and explanations of their analysis in the signal package. The explanations enable you to understand the reason behind the trade setup, which may help you to trust the signals and also enhance your trading knowledge.
But why do you need a trading signal?
Why trading signals can help your trading
You may think that you can trade on your own without the help of a trading signal. While that may be possible if you can register in a trading course and take the time to learn how to trade, trading signals can facilitate your trading journey in a lot of ways. These are some of the benefits of trading signals:
An easy way to profit from the financial market
Trading signals offers you an easy way to benefit from the opportunities in the financial market. You don’t need to go through the time-demanding and difficult process of learning how to analyze the markets to find trading opportunities. All you do is to subscribe to a trading signal service, receive the signals, place your trades, and make the profits.
The signal providers do all the hard work involved in finding good trade setups. They don’t just find the trade setups but also recommend the right stop loss and profit targets. Some even go ahead to suggest how to manage the trades, including when to move the stop loss to breakeven and when to close a portion of the trade.
A way to learn how to trade the markets
A trading signal can also help you learn about the markets and how to analyze them. This is especially true if the signal provider attaches charts to the signal package and offers explanations of the trade setups. In the analysis, you can see the factors that make up the trade setup and the reason behind them.
The explanations can also indicate the factors that move the markets and how much impact they are expected to have. Those can teach you one or two things about how the market works. You may also get to learn about some candlestick patterns, indicators, and chart patterns.
A source of improvement in your trading
Even if you already have knowledge about the financial markets and have been trading profitably, high-quality trading signals can improve your trading a lot. First, you will get to learn the signal provider’s perspective of the market, his thinking process, and how he analyzes the market.
Another point is that the trading signals can offer you new trading ideas to research on, and if the ideas are promising, you can use them to create new trading strategies. Hence, you can use the signals to optimize the trading strategies you are already using.
A means of diversifying your approach to the market
An experienced trader knows that no one strategy performs very well in all market conditions. Some strategies do well in a trending market, while some work better when the market is moving sideways. So, it pays to have different ways to attack the market.
A trading signal offers another approach to the market, which can help to diversify your exposure in the market. Diversifying your exposure helps you lower your overall risk in the market. When one approach is doing poorly, another may be doing great and helps to offset the poor results in the other one.
How to choose a good trading signal
Trading signals are worth it if you are able to pick a good one. But how do you know a good trading signal service? Let’s take a look at the things you must consider when choosing a trading signal.
The provider’s track record
Before you subscribe to any trading signal, make sure you take your time to study the provider’s track record. The provider may show some trading statistics and data; make sure you study them to ascertain the veracity of their track record. These are the things to look out for when analyzing the provider’s services.
- History: Find out when the provider started offering the trading signal service to know how long they have been in that business. Look for a signal provider that has been in the business for more than 5 years. They have seen different market conditions, so if they are profitable, their result is not likely from luck; they must know what they are doing.
- Consistency: Aside from the provider’s history, check for consistency of their signal performance. It is not enough that they started operating 5 years ago; find out whether they have been consistent all through those years.
- Profitability: The next thing is to assess their profitability. What is their win rate, and how much do they make per winning trade. Compare this to their loss rate and how much they lose per losing trade to get the profit factor. You may also consider the average reward/risk ratio of their trades.
- Risk: Here, you consider their approach to trading risks. Do they make use of stop loss orders? What is their maximum equity drawdown? Compare that with their maximum account balance drawdown. If there is a lot of difference, they may be paying lip service to stop loss. Note that equity drawdown indicates unrealized losses in open trades, while account balance drawdown shows realized losses.
The cost of the signal
Confirm how much it would cost you to subscribe to the signal for a month and a year. The cost of the trading signal is very important in deciding whether to purchase the signal service or not. If the service is too expensive, it may not worth the money, especially when compared with your trading account size. If you have a $1,000 account, subscribing to a signal service that costs $400 per annum means that you must make more than 40% profit to breakeven.
But extremely cheap or free signal services are not advisable either, because the provider forces you to use a specific broker and recoups their money from commissions.
You should also consider the suitability of the trading signal to your personal situation. For example, if you intend to swing trade, you should not subscribe to a signal provider that offers day trading signals. You may not be able to use the signals properly, because they require urgent execution.
Also, if you prefer intraday trading, you need to make sure that you are in the same time zone as the signal provider so that you don’t have to stay awake in the night trying to execute your trades or miss some trades when you are asleep.
Getting the best out of your trading signal
Even after you get every other thing right — a reasonable account size and a good signal provider — you should know how to trade to get the best out of the trading signals you receive. First, you need to develop your trading mind to think like a trader. Trading psychology is an important skill you need to succeed in your trading journey — whether you develop your strategy yourself or use a trading signal.
Next, you need to do the following:
- Manage your account risk: Your account risk is the percentage of your trading account that you are comfortable to risk in a trade. It is necessary you don’t risk more than 1-3% of your trading account balance in one trade. So, if you have a $3,000 account, you should only risk between $30 and $90 in each trade. This determines the price of stocks you can trade and the number of shares. Except on a platform that supports fractional trading, if you are using a 10% stop loss, you can’t buy a single share of a stock that is trading at $1,000 per share. You will be limited to stocks that trade below $900 per share, and the cheaper the stock, the more number of shares you can trade.
- Trade it as it is: We advise that you trade the recommended stocks in the trading signals the way they’re suggested, as long as your account can carry those trades. Don’t try to modify the stop loss or profit target. If a recommended stock is too expensive for your account balance, it is better you don’t take the trade. Tweaking the signal may affect the trading edge and the expected profitability. Over the long run, your performance would differ from that of the signal provider. Also, follow the recommended trade management plan.
- Trade in sample sizes: Don’t bother about the outcome of individual trades. Simply follow the suggestions in the trading signal and place your trades as they come. There is no point in trying to review the outcome of each trade. Some trades will be winners, and others will be losers. Sometimes, you may even have a streak of losses, which can instill some doubts in your mind. To overcome all the emotional issues, trade in small volumes and tell yourself you should trade a full sample size without bothering about the outcomes. Your sample size can be 30 trades or 50 trades.
- Review your trades: After you have traded a sample size, you can then review your trades to know how well the signal has performed. In your reviews, examine the win rate, the average win size, the average loss size, the highest number of losing streak, and maximum drawdown. The performance of the signal can either boost your confidence or dampen it, and it gives you a statistical basis for making decisions regarding the trading signal.
Yes, trading signals are worth it if you know how to make good use of them, but your account size has to be sizeable to justify the cost of the signal service. The signal has to be good enough to offer good returns, and the returns have to be big enough to take care of the cost of the signal and still leave you with some reasonable profit.
Here you can find our archive with all our swing trading articles.