Regardless of which signal provider you are looking to sign up with this information is extremely useful and will provide a strong guideline for you to follow in order to conduct the proper due diligence before spending money on a subscription with a signal provider. We will discuss the pitfalls and things that you need to watch out for in order to avoid the scams and false signal providers. There are some real and strong signal providers available to you in the market but it seems that finding these providers has become a complicated task. Some of these points will help you make an educated decision when choosing a signal provider.
Signal Copycats: Many online signal providers do not generate their own signals. In other words, they setup a website and copy other signal provider’s trades and pass them off as their own for a monthly fee. There are so many issues with this, I don’t even know where to begin. This is exactly why there is a high degree of scepticism in the market when it comes to black-box automated trading systems. The compounding effect of incorrect information can cause significant damage and losses to many individuals. One must understand the logic and details for a trading system in order to stand by it and provide adequate support to their clients. It’s shocking that someone can provide signals for a system they have zero knowledge about and cannot provide any support to their clients or explain any rational to the trades. This is a recipe for disaster as it’s very challenging to build successful trading models that work for every broker, every commission structure, every spread and every risk appetite and without the knowledge and trade logic. Companies cannot advise their clients effectively in order for their trading signals to work on every account. Do everything in your power to make sure that the firm, trader or company that is providing the signals, generate them or at least know how they are generated in detail.
Mismatch Trading Signals: Do trade signals in real time match the historical trades the Signal Provider displays? Often a Signal Provider will generate their own trading strategy and get excited to start sharing these results with their subscribers and with good intentions but they themselves have not thoroughly forward tested their strategy as that takes time and patience which leads to ignorance and consequently leads to many mistakes. A few common mistakes occur when traders don’t account for error in regards to slippage when using trailing stops, intra-bar order generation and charting flaws.
Slippage: Factoring slippage into trading models is one of the most critical factors in creating a successful trading strategy. This is especially true when working with high frequency trading strategies. Even though the some markets are highly liquid and trades should be filled instantly for small retail accounts, there is always slight variance in the theoretical back tested trades and the price the trades are filled at in reality. Even Latency issues from the time a signal is given to the time the trade is filled no matter how small affects the entry and exit price of any trading strategy during live trading due to the highly volatile nature of the markets.
For example, consider a trading strategy that executed 1000 trades per year with a trade size of 1 standard lot and generates a profit of $10,000 USD and there is slippage due to brokers difference or latency issues then even a 0.5 pip slippage on the buy side and 0.5 pip slippage on the sell side results in an approx. $10 USD loss on each trade (This varies for each currency pair but the principal remains the same). This changes the bottom line of the trading strategy drastically as 1000 trades x $10 USD / trade = $10,000 USD loss. In other words wiping all profits out in reality in relation to a $10,000 USD profit in the signal provider’s account.
Trailing Stops: Trailing stops can sometimes be your greatest asset if one uses it carefully by taking into consideration slippage and the timeframe they are trading in. These types of stops are extremely cumbersome for scalping and high frequency trading because a few pips difference over a large amount of trades changes the bottom line net profit significantly. If used incorrectly these types of order will cause frustration as historical trades will never seem to match your forward testing and live trade data. The reason for this is because of gaps in the historical data as well as varying spreads the brokers use that skews these stop orders from the back tested results. For strategies that use these types of order, one must account for a high degree of slippage and analyze the net profit for varying slippage levels to see how sensitive the trading system is to trailing stop errors.
Intra-Bar Orders : Intra-bar orders simply means that a trading system makes decisions in the middle of a bar or timeframe and not at the beginning or end of the current time frame. Trailing stops are generally executed as intra-bar orders. In other words, if we are trading using a 60 min time frame but the strategy is allowing trading order to be place every minute then this system uses intra-bar order generation. There is nothing wrong with Intra-bar order generation but it’s important to note that most data providers offer limited amount high resolution date such as tick data and second data. This data can be purchased but many retail data providers only offer such types of data for limited amounts of historical data. Therefore, trader and coders often set their intra-bar order generation to make decisions every minute instead of every second or every tick and as we know one minute is a long time for high frequency trading and a lot can change in the markets especially during times of high volatility. The compounding effect of being a few pips off on each trade is significant especially for high frequency trades over several years. As with trailing stops there is nothing wrong with intra-bar order generation in a strategy but one must account for a high degree of slippage on each trade to be sure that live trades results are better if not the same as the back tested results.
Charting Flaws: There are a number of different chart types such as the line chart, bar chart, candlestick chart, point and figure chart etc. Modern day software that allows traders to code their strategy using different charts types now offer more complex charts such as the Heiken-Ashi chart type. In some trading software these types of charts take the original data, such as the open, close, high and low and filter this data before plotting it onto a chart. When back testing or forward testing with such charts there is often significant error from the actual open of each bar and the open that is shown on the Heikin-Ashi chart. This causes significant confusion and later the traders realize that the open of this type of chart is in fact not the real open and therefore end of bar orders are getting filled at various levels different than the actual close of the current bar and open of the next bar.
Over Matching Trading Signals: One must be very careful for the too good to be true scenario when it comes to signals matching back-tested results and live trades as well. When a Signal Provider send you a signal in real time and then later when you check the historical trades and the trades match exactly there is a high probability that the signals or the trading data is being fabricated. The price and time an order gets filled at, may sometimes match but not for each trade and if you witness this regularly than it’s a very big red flag.
Abnormal Returns : Don’t fall for hype of huge returns. Defining huge is very difficult as there are strategies that can consistently make very high returns with low drawdown but usually these strategies never see the light of day as the traders and hedge funds will never expose them. It’s difficult to put a number on “huge” because it really comes down to the ratio of ROI / Drawdown. You can make very high returns for short periods of time and get a lucky streak but at the cost of risking your entire portfolio equity and wiping your account out. If a company advertises abnormal return then you must look “under the hood” and determine why this may be and if this approach is viable. The company maybe compounding their daily or weekly profits resulting in a high yielding strategy rather than over leveraging and or high risks. In conclusion, if the signal provider claims abnormally high returns then move forward with a sceptic eye and unless you understand the rational for the returns and are ok with the risk/reward or ROI/drawdown ratio, do not proceed. When in doubt just stay out.
Money Management: Drawdown is one of the most important aspects to any consistent successful trading model. If the signal provider’s money management skills does not limit the drawdown, you are doomed. We don’t know what we don’t know and when I first started programming software for the FX markets it was before the 2008 crash and I had back tested and forward tested my strategy thoroughly and what happened in 2008 shook my portfolio even with all the safety nets I had in place. We had never seen any volatility like that and no amount of back testing could have prepared a trader for the swings we saw during that time. We must be prepared for black swan events when being professional traders. There is no room for error or excuses and must be prepared. One of the most effective ways to prepare for what we don’t know is to have proper money management protocols in place which regulates the amount of exposure and leverage our strategy uses. When checking various signal providers trade data, sort the list by drawdown first before looking at any other factors of the trading strategy. The lower the maximum drawdown the better and the higher the ROI/drawdown ratio the better the strategy. These are two of the most important numbers in determining risk of any given strategy along with the Sharp Ratio and other such probability ratios which are beyond the scope of this article.
SELECTING A BROKER
You have found the right signal provider and you have done all your Due Diligence and considered all the factors discussed in the “Signal Provider” section and you are ready to put your hard earned capital to work. The company you are ready to subscribe to is legitimate and honest but there are important factors in choosing a broker to execute the strategy from your signal provider that must be considered before you go live to ensure that your account profits are in line with your signal provider’s. Here are some technical aspects that must be considered before you starting trading with real money.Commission & Spreads: Factoring commission costs and spreads into a strategy is one of the most important aspects of any trading strategy which often gets overlooked as its perceived that spreads and commissions are negligible as they are tighter and lower than ever before. This is one of the biggest mistakes one can make. Even though the Signal Provider may have correctly factored the spread or commission into their trading strategy based on their own broker, the strategy may not work for everybody as various brokers have significant differences in spreads and commissions when trading in the various market. If the signal provider is using Interactive Brokers for example and they have a large volume of trades they will receive a discounted commission rate. This factor alone will make the strategy profitable for the signal provider but will not result in the same profit in your trading accounts as you may be with a different broker who have spreads twice the size. Even if you are trading with the same broker the discounts that high volume traders receive are significant versus small retail accounts. The difference can potentially make or break a trading strategy for clients.
For example with Interactive Brokers an account with less than $25,000 USD equity will have to pay 1 basis point for each trade whereas an account at the same brokerage firm with an account size greater than $25,000 USD will pay 0.2 basis points in commissions, which is a massive difference by a factor of 5. The larger accounts are paying 5 times less commission and this could be the difference between a profitable strategy and loosing strategy especially for high frequency trades and scalping strategies. The commission rate also has a minimum commission value which needs to be taken into consideration and even higher volume traders at interactive brokers pay as little as 0.08 basis points which most retail traders could never achieve as the volumes required to receive this rate are very high. This comes back to my point that the signal provider must know the strategy very well in order to advise their clients to setup the proper account or to advise not to use certain strategies if their account size is too small as it just won’t work the same way as it works for the signal provider.
Leverage: Every broker offers different leverage or margin requirements for various currency pairs. It is important to note that the different margin requirements will affect the amount of capital that is required to successfully execute trades from the signal provider and to maintain the same money management protocols of the signal provider. With new regulations on the maximum drawdown or loss acceptable for each position can affect the trading strategy as some strategies use hedging and cost averaging or initiate smaller position sizes but allow for a larger drawdown on each position held. If the broker stops your positions than you will experience losses which don’t occur on the signal providers master account. Important to read carefully each signal provider requirements and if there are any questions to ask the company directly so that your accounts are setup properly for the trading strategy to be successful.
Latency and Execution: The time it takes from the signal provider’s trades to be initiated and for the actual trade to be filled can affect the performance of the signal providers strategy. Latency issues have significantly reduced with advanced technologies but for high frequency trading a few milliseconds can adversely affect the actual net profit over time.
TRADE WITH TRIOMNIA
We highlighted several issues and pitfalls when trading with various signal providers in the “Signal Provider” section as well as in the “Selecting a Broker” section. Here we will address the way Triomnia is setup and the protocols that are put in place in order to mitigate the risk for our clients and to build trust as a real and honest advisory service. The greatest challenge is to provide the necessary due diligence to our users that help differentiate our service from the copycats, scams and inexperienced traders and signal providers.
Copycat Signal Providers: At Triomnia we develop and code all of our own strategies and only provide signals to our clients that are generated by us. Therefore, we know the logic and strategy rational for each of our strategies in depth and can provide the highest quality of customer service to our clients. In order for our clients to feel comfortable that our trades are unique and not copied from other signal providers we provide in-depth explanation of our strategies and how they operate. The in-depth knowledge of our trading strategies coupled with the live videos of our trading platform hopefully provides enough comfort to our clients that our trades are in fact generated by our own algorithms.
Mismatch Trading Signals: At Triomnia we thoroughly understand the pitfalls of back-tested results and trade copy software and if you don’t make money we don’t make money. We may not have the highest returns compared to other online advisors who claim they make above average returns but our trades are real and are designed to be copied without any mismatch in trades from our account to our clients. We build trading software specifically tailored for large institutional clients which work the same if not better for retail clients. It’s important because many trading signal provider’s strategies work on small accounts but when scaling the strategy to institutional levels these strategies fail for a number of reason. The best way to explain how we mitigate most of the mismatch trading signal issues can be better explained by an example.
We launched our services with “The Robust Pawn” strategy. This strategy is a long/short strategy which trades 28 currency pairs at any given time on a 377 min regular candlestick chart. The strategy is in the market 99% of the time, therefore for any given currency pair the strategy is either long or short but never flat. Therefore, we have 28 open trades at any given time. Decision to sell or buy each currency pair is only made at the end of a 377 min bar but never in the middle of the bar. Consequently, decisions are never made using a trailing stop of any kind and decisions are never made intra-bar both of which are significant causes to mismatch strategies. The larger time frame also ensures that slippage becomes negligible as there are very few trades in a given year in comparison to high frequency trading. Even if slippage were to occur by 10 pips (Which is very high as most trader account for 1 to 2 pips slippage) on each trade this would result in a loss of approx. $4000 USD for the average 400 trades a year this strategy executes given that each trade is 1 standard lot. The average profit per year for this strategy is $189,000 USD on a $1,000,000 USD account. As you can clearly see slippage would account for an error of no more than 2.1% to the bottom line annualized net profit. All of our strategies have this fundamental approach which is robust for hedge funds and institutional clients but is even more robust for retail clients. In the future if we release other strategies with higher frequency of trades but we will incorporate a significant margin of error and still be profitable so that our clients receive uninflated trading results even if there is slippage.
Overmatching: Fabricating results is the only way overmatching of results takes places. This is fraud and our reputation means a lot more to be involved in such activity. Our results and trades are easily verified by looking at our brokerage account trades and matching it with our trade signals and time. Moreover, we offer a 30-day free trial period and this can be verified in real time.
Enormous Returns: As of now we have not been fortunate to achieve 100% annual returns with minimal drawdown and consistency as other so called “Signal Providers” claim unless we compound our profits of course. Even our Queen and King strategies which we use privately for our personal trading don’t produce such returns. Our strategy to produce high yields is through the power of slow and compounding. The only time a Triomnia strategies produce returns higher than 50% per annum is when we compound our profits but never through high risk, high leverage or gambling, hoping to get lucky and go on a winning streak just to win over some greedy clients. We are here for the long term and expect we can make more money that way. Our reputation and trade history will speak for itself and once again we provide a 30-day free trial period so much of these doubt can be mitigated by watching our trades live and matching them with our displayed performance reports.
Money Management: We pride ourselves on our level of discipline in regards to money management for all Triomnia products. We never allow a maximum drawdown of greater than 25%. Our strategies are also applied to 28 currency pairs reducing the risk even further, leaving a significant amount of cushion for what we don’t know. We ensure that our clients are properly setup so that they have the same ratios and money management in place as we do. We provide ourselves on the trades we generate and share with our clients and expect our clients to follow our strict protocols and placing trades in a disciplined manner based on the email trade alerts our software generates. As long as you strictly follow our money management protocols your account will maintain a high degree of capital preservation with strong consistent profits.