As a hedge fund manager I know that professionally we expect a certain standard in ‘trading signals’ in forex and stocks. Some call them algos. Whatever they are called we’ve got a checklist you should use below.
But most private ie retail investors are clueless. Here is what you should look for based on not only our expertise, but more importantly that of leading traders from the Financial Times book – The Mind of a Trader, and based on what leading hedge funds like Winton Capital, AHL, Brevan Howard, Aspect have taught the world.
Some of the well researched Financial Times published books on which this article is based
Trading Signals – Brokers with a Conflict of Interest
For retail clients who are looking at a magical auto trader – forget it. We know this this because we did a small experiment. We looked at the ‘copy-trading’ auto traders promoted by brokers and other auto signal providers eg Etoro, IG Index etc.
Not one met the professional standards of a sufficiently high sortino (average return in excess of average deviation from that average return), let alone drawdown under 20% (peak to trough) combined with an Alpha (ability to outperform the market) . Sound complicated? Well read on, else you are asking to lose your money.
These organisations have a conflict of interest. They are on the other side of your trades (not a secret) and they are required to tell you how many of their clients lose money (typically 70%). So if their signals work, why do so many lose money?
Why are they not hedge funds running money and taking the 20% of profits? Because it’s more lucrative to take 100% of the losses when 70% lose money.
Software Companies Claiming to Have the Holy Grail
These really bother me. They are in the business of charging you subscriptions, they are not spun out of hedge funds either. Of they worked – you would have a hedge fund bolted. But they do not meet any of the checklist below either.
Of course they have the standard ‘landing page’ to seduce you:
Specific promise of an exact monthly sum of money
A few quotes from ‘clients’
A couple of ‘client’ videos if you’re lucky and they can be bothered to get actors
4. Claims you only need to spend a few minutes daily
5. Too good to be true ‘accuracy’ eg 80-90% right calls – when George Soros is right 50% of the time
6. High trade size eg £3 or $3 per pip/point move which sound small but will cost £1,000 in losses on any average day of trading
Checklist for Any Trading Signals in Forex or Stocks – The Gold Standard
Are they spun out of a hedge fund? If not, they are lying to you that they know what they are doing.
Track records on websites are too easy to manipulate to have any relevance other than a marketing scam for the deluded. Common scams include multiple ‘track records’ and only showing the one leading by accident. Another scam is few trades or adding capital but confusing people on the ‘equity chart’ by them assuming it was profits.
Credentials of the inventor. This is a high value industry. You would expect the best to have been to a top tier university, be FCA regulated money manager. Honestly, good people do not discover a money making approach who do have never managed to get to a top tier University and had money thrown at them and become a regulated fund manager first. When we spun out of our hedge fund Pipspredator.com we did so as a tech spinout that can IPO in its own right. Tech IPOs make billions – we are in the making billions business.
Have they won awards from credible sources eg Financial Times not from no name publishers who dish out awards to advertisers and sponsors. Come on, it’s your money, set a higher standard and stop being duped.
Claims focussed on being right and not winning streaks (you can get a coin to give a 100% winning streak) in trading what is important is that your strategy makes more money from winning than from losing not how often it is right – Bill Lipshutz (Global Head of Forex Trading, Salomon Brothers, in Mind of a Trader (Financial Times).
If they are good the TV studios will have them – eg Buffett, Soros. Fakes will put the TV logo on their screen or arrange a no name own TV interview.
Peer reviews – they have to have reviews from the industry – these are near impossible to get – not reviews from ‘clients’ or the ‘public’ which can’t be verified. And by peers I mean hedge fund legends, BBC, Financial Times etc. We made sure we met these high standards – the gold standard.
Some of the ones using trading signals we’ve met who meet the above criteria and achieve the Gold Standard:
Winton Capital, AHL, Renaissance Technologies, Pipspredator.com – email us if you want us to evaluate any others on these criteria.
What do they have in common beyond the above criteria?
Profits even if right 50% of the time
No reward targets ie do not cap profits ie no risk/reward ratios for that reason
Stop losses to cap losses. Never add to losses.
Add to winners
Stepped trailing stop losses (avoid dynamic)
Usually trend following ie momentum
Not simplistic out of date indicator based eg MACD, head and shoulder, Eliot
The Correct Use of Trading Signals
Trading signals for retail investors will be indicative to get you 90% of the way there because you will lack the super computing AI edge to do millions of trades, so you will need/want something which leaves some simpler trade selection in your own hands.
Like anti-virus software companies we monitor the latest scams
Fake review sites offering to sell something cheaper than direct from the producer
Fake review sites using google search terms owned by a brand owner and then trashing them to direct you to their own fake product
Software companies without a hedge fund background promising a specific monthly return
Internet reviewers set up by competitors to trash a product – don’t trust members of the public reviews – you cannot trust them on Amazon let alone lesser websites. They are too often and easy to fake – positive or negative ones. Instead look to see if hedge fund managers have endorsed, or for instance the BBC has said, ‘you made money on this’ ie was it hand held following? Sorry, sad but true.
Best Trading Signals – Forex and Stocks: The Dangers in Exposing This Industry
When you have you own Financial Times column, author, BBC paper reviews, TV appearances, you will get people using a common scam trick – they will create fake products claiming to be endorsed by you. Or claiming to have a better product than yours (both false and without disclosing the ‘better product’ is fake/giving them kick-backs).
So the importance of due diligence is greater than ever.
Alpesh Patel OBE