Trading Signals Forex

When choosing a Trading Signal provider, clients are usually given a trial period in which they can experience the service directly and decide whether the provider is profitable enough. Nevertheless, such offers can often mislead people and to show performance that is the result of nothing but sheer luck. In this series of articles we will attempt to focus on the primary criterias to inspecting Trading Signals Providers.

Risk:Reward Ratio
Risk:Reward is an important concept in trading which represents the ratio between the potential loss in a trade and the potential profit. It is usually calculated by dividing the Take Profit size by Stop Loss size.

Risk:Reward in a Trade

This ratio is highly important, as it gives us an estimation of how big the profits are, in relation to the losses. The size of the number is very important in judging traders and signal providers, as it gives us valuable information about the quality of their trades.

Trade Quality and Risk:Reward
The relation between Risk:Reward and trade quality is simple: the greater the Risk:Reward ratio, the higher the trade quality. Great Risk:Reward indicates that the trader is very precise in his trade timing, and is able to risk a very small amount but take big profits.

I would consider Risk:Reward above 2 reasonable for trading, and above 3 to be very profitable. There are few trades whose Risk:Reward ratio is above 3 – and as many trades like this, the better the signal provider.

Be Careful of providers which take trades with extremely small Risk:Reward ratio (less than 0.5), and trades whose risk is greater than its profit. This indicates that these trades are highly risky, and eventually such trader is prone to losing. This strategy are used by many fraudulent providers. By risking a very big amount and taking small profits, such provider is able to withstand a period of 100% winnings, that may mislead customers to believe that it is a profitable service. Eventually, such services end up losing vast amounts of money.

Do not overlook the big picture
While great Risk:Reward is essential for trades, do not forget that the most important criteria is the bottom line: profits. If the trader is taking only trades with high Risk:Reward but is overall in loss, discard it as a service provider.

Conclusion
Risk:Reward ratio is a good tool to estimate the actual profitability of trading providers and trading systems, and give clients a clue on how really good the trades are. Next time you are evaluate a trading signal you will have a more clearer idea on its performance.