The Internet is overflowing with ads, articles, companies and individuals trying to provide you with the next great trading strategy that will make you rich overnight. Stop, my friend, here are tips to help you spot a scam.
First and foremost, trading strategies will not really help you become a good trader. In fact, you need a whole system. When you create a trading plan, it must include how you will enter the markets, exit the markets and manage your money. It must also specify under what market conditions you should do all these things. This is a system that tells you everything you need to know about how you will trade. A strategy, on the other hand, only tells you when to enter and exit, and may not tell you under which conditions it performs best or poorly. It may also not provide guidance on position size or whether you can trade multiple assets at the same time - issues that are very important to address. In other words, the strategy may contain the missing information you need to be successful. We need a complete trading system.... but marketers are smart, so they can easily call the product they sell a "system" to make it sound more complete. But is that really the case? Here are some things to look out for that might suggest the product is probably a waste of money:
A boxed system is one in which you don't know how the strategy works - it's an opaque "black box." For example, the product may simply be a series of indicators or a service that tells you when to trade, but not why. It won't make you a better trader because you don't know what's going on behind the scenes. If the signaling product or service stops working, you are left with nothing. Even if you have made money from the product/service, you have to start from scratch. Make sure that if you buy something, it explains how it works so that you don't have to rely on the product/service in the end.
Is it possible to achieve a win ratio of 90%? Of course, but it is also possible to lose money with a win ratio of 90%. Statistics can be easily manipulated to tell a partial truth or make up lies. Other common tactics include saying, for example: "I made $500 in one day!" So what? That doesn't actually tell you anything. If it involved a $1,000,000 account, making $500 wouldn't be so great. And if they lost $3,000 the day before, making just $500 today and bragging about it is rather lousy. Read between the lines. What is not being said? To understand performance, you need some information: account size (capital), percentage return, amount at risk in each trade, amount of profit per trade, win/loss ratio, biggest winner, biggest loser, average winner, average loser, number of trades and the period during which the strategy was tested/profitable.
There are also other indicators that can help you, but if you ask a company for these bits of information and it can't or won't give you them, be suspicious. You can usually get an idea of what gaps and trends the system has by looking at the statistics above. One of the most important things is that the strategy should be tested over a long period of time and in all market conditions - upward trends, downward trends, ranges, volatile and calm conditions. It doesn't necessarily have to be profitable in each of these environments, but it should at least be traded in each of them to know that the system is profitable overall. Often marketers only publish results for a period in which the strategy worked very well. However, this does not give a true idea of how the strategy or system is performing in the long term.
When it comes to statistics, there is something else to consider. If the system is profitable, this result is based on all transactions. If you buy a product or service, are you going to trade all of them? The problem that many traders who subscribe to a signal service face is that they don't trade all the signals. If you don't trade all the signals, your personal results may differ significantly from the typical results of the service.
Avoid a system that only trades in one direction, for example, only buying assets but not selling them short. Markets go up and down; you want to participate in both trends.
You should be able to test the product and be able to cancel without fuss if the service is not for you. Typically, a quick Google search of a trade forum will reveal what others have said about the product or service. There is no trial period, no contract. Don't trust anyone, test everything yourself. If they won't let you, be careful.
The product or service should not make you dependent on them. It should show you the behind-the-scenes so you can eventually trade on your own. Good products will always have customers, because there are people who don't want to do the work themselves, and there are always new traders. There is no reason to make every client completely dependent. Be careful of the statistics that are thrown out. Ask yourself what the statistics are not telling you. Also, if the statistics they provide are legitimate, you will have to trade all the signals to benefit and get the results typical of the service. Of course, keep in mind that past performance is not indicative of future results. That's why it's a good idea to do your homework and make sure that the strategy/system/service/product is based on a long history and has proven its viability in all market conditions. Test the product/system/service before you buy it. If they won't let you try it, be suspicious.