The fact that the vast majority of traders and investors on the Forex Market are losing money is well known. The so-called statistics claim that more than 95% of the traders lose money. It can seem really huge but when you are a true profitable trader, it’s always surprising to see the incredible amount of scams and bullshit on the web. The ratio could be the same : 95% of shit and 5% of useful information. Nothing is done to help the wannabe traders in a efficient way. I’ll try to give some tips for the investors to identify the wrong and dangerous trading systems in a series of articles.
To assess properly a trading system it’s important to understand the information displayed on your screen, like Myfxbook statistics for example. There is a lot to say about it. However, I’d like to write about a simple and easy way to know if a signal provider, trader, system is not transparent with its performance.
I’m still surprised to see all these so-called professional traders and magical trading systems printing their performance in PIPS. Honestly, it doesn’t make sense.
It’s important to understand that the quantity of PIPS swallowed during the month is not important at all. The percentage growth is.
Why ? Because the quantity of pips doesn’t represent the quantity of money you can earn. The Pip is the basic value of the Market and has to be converted to make sense in term of money. It’s crucial to understand that even if you earn a lot of pips per day, it doesn’t mean you earn a lot money. As I already explained on this website, if you want to manage properly your risks on the Market, you have to trade with constant risk : you risk always the same amount of capital per trade (subliminal reminder message : you never know if a trade will be a winner or a loser one, so treat each trade with the same risk).
By using constant risk approach, you don’t care about the amount of pips. The amount of pips highly depends of the trading style and timeframe used in a system. To be more concrete, here are examples of trades I took with big difference in the amount of Pips.
First, the GBPCHF Weekly trade I took during March 2015 :
Earned Pips : 454 pips
Second, the AUDJPY H4 trade I took few weeks ago :
Earned Pips : 75 pips
In the first case, I won 454 pips on the GBPCHF trade and in the second case, I won only 75 pips on the AUDJPY trade. Did I earn more money from the GBPCHF trade with more pips involved ? Absolutely not. I earned the exact same amount of money : 2%. That’s all.
Why the amount of pips doesn’t make any difference ? Because my lot size was different. It was calculated to risk only 2% on each trade. Since the first trade is a Weekly one, the stoploss was wider than the one on the AUDJPY trade, which was based on the H4 timeframe.
It was an example. Now think about it : when a pro-trader tell you he is able to make hundreds of pips every week, does it make sense ? In fact, no. He could earn plenty of pips every day and make only tiny percentage growth depending on the risk he takes on the Market. And don’t forget the amount of pips doesn’t give the risk approach of the traders.
To show you where lies the problem for the retail investors, I gone to the signal providers list on the famous Myfxbook website and I took the top 3 signal providers :
First one : Pipsar
Second one : Forexsignum
Third one : App-Forex-Signals
Funny, isn’t it ? Nobody talks about percentage growth, only the amount of pips. You can even see the graphs from Myfxbook displaying the quantity of pips per month but not the native Myfxbook graph with the percentage growth…
With these data, you can’t know if the performances are good for each signal provider. Don’t get me wrong : I don’t say they not making money. I only say : they are not transparent on their performance because displaying the amount of pips has no sense.
And don’t forget that their drawdowns are not even visible (except forexsignum)…
My advice : Be careful when you see this kind of website. I chose them almost randomly as examples. The performance data, expressed as Pips, doesn’t show anything. It’s not a good criteria to choose a reliable trading system. The percentage growth is appropriate in conjunction with other data (expectancy, profit factor, historical drawdowns, average R:R, …).