Whether you are trading stocks, forex, or futures a signal based trading system may save countless hours of research time. Timing your trade is essential in developing a productive trading system. Online signal providers can eliminate the substantial time it takes to follow the markets and time the trade.
Trading signals are beneficial in trade timing but cannot replace a solid systematic plan. Many novice traders expect the signal service to do all the trading for them. Unfortunately, this is not the case. It is necessary to develop skills pertaining to money management, probabilities, and the risk/reward picture.
Without a money management plan the trader will eventually fail. The trader must develop a plan to allocate funds based on possible losses.Novice traders are more concerned with how much they can make on a trade. They should also be concerned with how much they can lose on a trade. Allocating funds equally among trades is a good start. For example, the trader may decide that the maximum loss per trade may be 3% of the total account value.
When the investor enters a position a stop loss order should also be initiated. This stop order will automatically exit the position if a certain amount of money has been lost. In the above example, once 3% of the account value has been lost the trade will be closed. Investors must accept the fact that a percentage of trades will be loosers no matter which signal system they are using.
Trading signals are based on probabilities. Do the math. If a trader were to develop a system that had a 50% win ratio and paid out $100 for each win and $50 for each loss, this would be a spectacular result. Many signal providers offer signals that produce 80% or better winners. Novice traders still manage to lose money because they will not discipline themselves enough to stick to a solid money management plan.
The trader needs to select a signal service, learn how to trade it, and initiate the money management plan. Every trade requires two exit strategies. The first exit is the stop loss. This is the maximum amount we will lose on the trade. If a signal has a win ratio of 75% then we know it will fail 25% of the time.
The signal provider will either give you the stop loss exit or teach you to determine your own stop loss point. It is the same with the profit target. I prefer the “learn and earn” method. The trader needs to take an active role and participate in the trade. Nobody is going to make you wealthy.
The second exit strategy is the targeted win. The win target may not be the maximum profit that could be made but it is usually an acceptable profit target. The trader will rarely capture the maximum win on any trade. Acceptable win/loss ratios should be considered and applied to each trade. When the investor enters the trade the expected win and loss will be known.
I don’t want to over simplify the trading process but I will offer a simple example. When the trader enters trade XYZ the outcome is already known. The trade will capture a $100 win 75% of the time and experience a $50 loss 25% of the time. If you’re not trading this way it may be time to re-think your methods.