Forex investors are pretty much critical about the performance of their forex investments according to certain factors and benchmarks. The term ROI or Return On Investment and Drawdown are two of the most popular terms that are often used when referring to a forex account’s profitability and performance.

But what exactly are ROI and Drawdown? How can these two financial terms help a forex investor understand his account better? And in relation to free forex signal providers, how should an investor view ROI and Drawdown in evaluating the forex experts that should handle his account?

Return On Investment

ROI, the acronym for Return On Investment, is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of investments. To calculate the ROI, the benefit (return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.

ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

In simple terms, ROI measures the profitability of an investment, And in forex parlance, ROI is a result of all the pips gained from trading currency pairs. A positive ROI means that the forex investment has gained from trading. While a negative ROI indicates that the forex investment is losing.

It should be noted that when calculating the ROI of an investment, it is the actual value of the capital which should be used, and not the balance. The capital figure represents a more accurate standing of an investment account because it already factors in all past trading profits and gains, including all open positions which are also either gaining or losing.

Drawdown

Drawdown, on the other hand, is the peak-to-trough decline during a specific period of an investment. In forex trading, this is usually viewed in relation to trading positions. When an investor enters a position in the forex market, prices do not necessarily go immediately in the direction of his trade. In fact, whenever a forex trader enters a trade, he is immediately at a loss position because of the spread. Drawdown is the measure of the maximum loss that the forex trader must endure and go through before the position goes positive and turns to a profit, or liquidate. Of course, the lower drawdown, the better it is for the investor since drawdown connotes the risk involved in the trade. If a forex trader can always minimize the risk in every position that he takes by keeping his trading drawdown at a minimum level, then he can achieve an ideal risk-reward ratio for his investment.

Evaluating Forex Signal Providers

ROI and Drawdown are important measures that can be used when evaluating forex signal providers. While a forex signal provider may boast of a skyrocketing ROI for his investment portfolio, it is also important to take note of the drawdowns that he has incurred to be able to achieve his high ROI. If a forex signal provider’s drawdown is excessively high, it should redflag the investor that this provider may be putting too much risks on his trades. And a high-risk type of signal provider may not become effective for everyone, especially for forex investors with only a small amount of capital in the balance. High drawdowns can certainly wipe out small capital which cannot sustain the high-risk trades given out by the signal providers.

So, while a high ROI may be a good indication of the profitability of an account, the drawdown should be given equal importance as well, as it indicates the risk factor and even the resulting sustainability of an investment.

Of course, the best combination would be a high ROI with a low Drawdown type of investment. If a forex signal provider carries this kind of a combination, it improves a forex account’s profitability in the long run. But if such combination is hard to find, the next best solution is to find the perfect balance between the two.

Maybe you are wondering why some forex experts would give out their forex signals for free. What is it for them if they would not be charging their subscribers any monthly fee for the trade signals that they send out?

The answer is pretty simple. They get commissions from the forex brokers themselves.

Instead of charging the subscribers a fixed monthly fee, which is the usual case for forex signal providers, these forex experts get a commission based on the trades that their subscribers make which are triggered by the signals the experts provide in the first place.

Forex Signals and Their Reputation

The commissions that these forex signal providers get are based on the number of lots that are traded by their subscribers. Although it does not matter to them whether their trade signals are correct, since they get paid commission as long as lots are traded, they still have their reputation and trading records to protect. Remember that in the financial investment industry, reputation could mean everything. These forex signal providers also have live accounts of their own that they trade based on the signals that they send out. And if the signals that they send out are all incorrect, then it would definitely reflect on their trading histories which, for all intents and purposes, serve as their viewable portfolio for investors considering to acquire their services.

Forex Brokers Pay

Who pays their commissions? The forex brokers do.

What is it for the forex brokers that they pay the commissions of these forex signal providers? Remember that forex brokers, whether the forex signal providers are present or not, gain profit from forex investors based on the spread for every trade the investors make. They cut a certain percentage from this revenue they get from the spread and give it to the signal providers. Although it may seem that the forex brokers are just sharing their revenues with the signal providers, the advantage that these brokers get from this deal is that the signal providers actually give the brokers more business with the forex signals that they send out. Although the brokers’ revenue per trade becomes smaller, the overall effect of the signal providers bringing in more trades means that the total revenue of the brokers from this kind of a deal actually increases.

Free Forex Signals Means Win-Win

And lastly, you may ask, what is it for the forex investor?

The forex investor gets free forex signals from forex experts who would do everything to make the correct analysis of the market since they are also trading their own accounts according to the signals that they provide. And the forex investor trades with a forex broker who would be contented with the regular stream of revenue he gets with the trading signals that the experts provide.

It is actually a win-win-win situation.

Forex traders have varying styles and strategies in the way they trade. And based on their forex trading strategies, they can be classified into two major groups: short term forex traders and long term forex traders.

Short Term Forex Trading

Short term forex trading is the kind of trading employed by investors who prefer the action and volatility of intra-day trading. Most of the time investors who prefer short term trading would want to sit in front of their computers and wait for the perfect set up according to the technical analysis of their trading strategy. Once the perfect set up is achieved, they enter the market. And once they enter a position in the forex market, they continue to monitor that trade until it gives them a profit or a loss, depending on where the price of the currency pair goes.

Short term forex trading has its own advantages. The most obvious of which is that with the quick entry and exit of the investor in the forex market, he already knows by the end of the day whether he has profited or lost with the trade position that he took. Short term forex trading also takes away the danger of prolonged exposure of an investor’s capital in a volatile market. Since most of the time, a short term forex trader liquidates his position whenever he foresees that he will not be able to monitor the market for a prolonged period of time, he protects his capital from any unforeseen eventuality that may affect the currencies he is trading.

Long Term Forex Trading

Long term forex trading, on the other hand, is the type of trading employed by investors who rely more on the fundamental basis of currencies. There may be some degree of technical analysis involved, both it is not as pronounced when compared to short term forex trading where technical analysis dictates the perfect timing of entries and exits. Long term forex trading may take anywhere from weeks to months in order to liquidate a position. An investor who prefers long term forex trading does not really care about the daily volatility in the prices of currencies he is trading. What he mostly cares about is the general direction of the currency pair, and the underlying fundamentals, such as the corresponding countries’ economic conditions, to support and continue supporting the position that they are in.

The main advantage of long term forex trading is that it does not tie up the forex investor in front of his computer just to monitor the trade. This is very ideal for the passive forex investor with a day job who just wants to take advantage of the benefits of forex without the stress associated with price fluctuations affecting the profitability of trade positions.

Depends On Trading Goals and Personality

Being a short term or a long term forex investor really depends on the type of trading personality and investment goals of a particular investor. If he likes the fast-paced, high stress level, and action-packed environment, then short term forex trading may be for him.

However, for some types of forex investors, they do not want the excitement of the live daily action the forex market. They do not care if the lack of action in their forex investment holds their capital. They prefer protecting their capital than exposing them to the high risks of day-trading.

So when deciding on what type of forex investor you would want to be, ask yourself the necessary questions pertaining to your trading personality. The amount of time that you can allot to the actual trading of your investment has a lot to do with it. Can you actually do the monitoring required by day-trading if you prefer to be a short time forex investor? How much time can you actually spare each day to analyze the market and wait for the perfect set up using technical analysis? Maybe you would be better off being a long term forex trader if your investment goal is just to find a more lucrative alternative to your bank time deposit. And it is also important to note that forex investors should take their health into consideration when deciding which type of investor they want to be. The excitement of the daily volatility in short term forex investing may prove to be too much for a person with a weak heart.

And lastly, although it is short term vs. long term forex trading, who says you cannot combine both? There are ways in doing it in order for an investor to get the benefits of both worlds.

Various Forex Signal Providers

Forex Signal Providers are as varied as the different trading strategies being employed in forex. There are many forex signal providers offering their services in the internet. And it is quite a task choosing which of these forex signal providers would fit with your investment goals in forex.

So how do you choose the best forex signal providers for you?

Your Goals and Personality

It all mainly depends on your investment goals and trading personality. Different forex investors have different investment goals and trading personalities.

On investment goals, these are some investors who prefer a steady but sure increase in their capital. Some prefer very low drawdowns and very minimal exposures in terms of lot positions. Others like to amass their profits overnight, while some prefer to build on their gains over the course of days, or even weeks.

Trading personalities are also very varied. There are investors who like scalping and would settle for any profit, even if the corresponding risks associated with it are quite high. Other forex investors prefer long-term trades which are more based on fundamentals, and not on technicals. Others have multi-faceted trading personalities where they prefer to employ different kinds of trading strategies depending on what the market gives them. Whether the market is trending, ranging or reversing, they have the appropriate trading strategies to use to gain full advantage of every market condition.

Based on these variations in investment goals and trading personalities, you should choose your forex signal providers based on these. The closer the forex signal provider is to your goals and personality, the better fit he is for you. You have expectations as an investor, and your signal provider has a track record of how he analyzes the market and sends out his forex signals. See if the two can reconcile and match as closely as possible. If they do not, then choose another forex signal provider.

Track Record of Signal Providers

Know the track record of the signal providers. It is a lot better if they have trading histories of their own accounts that they trade according to the signals that they provide. Research their trading records and the signals that they sent out. Analyze if you are comfortable with the way they “pull the trigger” for every trade that they make. Scrutinize the positions that they open.

Ask a number of questions to yourself. How did they arrive at their ROI? Was it based on a very few but immensely profitable trades? Or is the high ROI a result of numerous small trades which built up their capital. What are their average pip gains against average pip losses for their positions? Are you comfortable with the way they open numerous positions? At which point do they cut losses? Are the risks that they are taking tolerable for you?

It is not enough to base your decisions on their ROI alone. It is true that a higher ROI is better for investments. But if the high ROI carries with it a very high risk factor to be able to achieve it, would you be willing to take the same risks yourself with every trade signal that your forex signal providers make?

Just as studying the forex markets and learning how to trade entail a lot of research and analysis, so is choosing a forex signal provider. It is your investment that you are talking about here. So be very careful and diligent in doing your homework. Choose your forex signal providers wisely.

Forex trading is becoming a more popular investment option nowadays. This is largely due to its availability online. Its popularity on the internet can be verified by the numerous google searches by various people from all over the world who want to invest in this very lucrative investment online.

But what exactly are the advantages of forex trading? What precisely are the reason why many investors find this investment option a very lucrative option on where they can place their money?

Advantages Of Forex Trading

Below are seven of the advantages of forex trading.

1. As stated above, the popularity of forex is largely due to its availability online. A few years back, forex trading was just available to the banks and large financial institutions. When forex trading became available online, it opened the door for the average investor to take advantage of forex trading’s profitability. And since forex trading is now available online, it becomes totally convenient for people to invest in forex. They can do everything over the internet – from the opening of the account, to the funding of their account, to the monitoring of the forex markets, to the executions of the trades, and up to the withdrawal of funds. This convenience makes it a very attractive option for investors.
2. Forex trading offers its investors the advantage of leverage. Leverage is being able to control a bigger amount of money with your actual investment. With forex brokers offering leverages of up to 400:1 on forex accounts, it is no wonder that investors are finding forex to be a very valuable investment opportunity that they do not want to pass on.
3. Transactions in forex amount to 4 trillion dollars a day. That is a huge amount of turnover. And that means that the forex market is a very liquid market with almost no probability of someone controlling or manipulating prices of currencies according to their favor. Of course, there are times when central banks step in to intervene. But in the end, market forces still prevail in finding the true value of a particular currency. This makes the forex market an almost perfect market to trade in.
4. The forex industry has grown to be a very wide and dominant industry in the investment business. And with this appears the various service providers that help forex investors improve their trading portfolios. And these include the automation of forex trading. There are now trading robots, or Expert Advisors, which can be readily attached to an investor’s trading platform to automate his forex trading. These trading robots are computer procedures that have a pre-set of rules to follow on how they would send out order signals to the brokers. They are based on technical analysis of the price charts using various technical indicators. Trading with these robots take away the emotional factor which sometimes hinders an investor’s decision-making objectivity. Aside from these forex robots, there are also a lot of signal providers offering their services, and even fund managers who would handle the trading of forex accounts.
5. The forex market is a 24 x 5 market. It means that when the forex market opens on Monday in Asia, it does not stop taking orders and transactions until Friday night in North America. It is a continuous stream of opportunities for anyone wanting to take advantage of price fluctuations in the currency market. That is a big advantage when compared to stock trading where trading takes a breather at the end of each day. In forex, there is much more room for price trends to continue its momentum.
6. Short-selling is allowed in forex trading. This is one very huge advantage that forex has over stock trading. This means that whichever way that the price for any currency pair goes, whether up or down, there is always opportunity to gain profits.
7. And lastly, forex trading allows an investor to concentrate on even just one currency pair to specialize in. Unlike stock trading where an investor would be monitoring numerous companies to be able to analyze and predict the performance of those companies’ stock prices, forex offers the investor the focus on one currency pair. In fact, it is very much a common practice among forex investors to “master” a certain currency and familiarize themselves with the characteristics of its price movements.

The advantages of forex trading have made it to be a very viable option for investors who want to take advantage of the very lucrative opportunities presented everyday in the forex market. And with the proper amount of knowledge and training, an investor can definitely profit from forex trading using the right tools and discipline.