Examining a Forex
Equity Curve
     
 
What Can We Learn From
An Equity Curve
When we choose a forex trader to use as a third party
signal provider we want someone with a smooth steady
uptrend in their equity curve. The aim of
this article is to point the reader in the right
direction for things to look out for when examining a
potential signal provider' s equity curve.
The first thing we want to look out for is a trader who
made all of their profits in one place (graph to the
right). As you can see from the equity graph to the
right, this trader made nearly all of his profits in a
day or 2. This generally means that the trader took
huge risk to make an attractive profit on paper and
attract investors. What you don't see is that if
these risky trades are not successful, the trader simply
abandons the account and starts a new account with the
same goal in mind.
Remember, I'm not saying that a huge win in a short
period of time is a bad thing. I'm just commenting
that this particular trader has nothing to lose when this
gain is made and there is no reason for him to not just
abandon the account if the trade goes bad. Some
traders start with nice gains and are very good
traders. This is just something to look out
for.
The next type of trader we look out for is the trader who
has regular dramatic losses (graph below). In the
graph below you can see the repeated  dramatic losses this trader takes. The
reasons for this could be a number of things. When a
trade goes wrong for this trader the wheels may just come
off and his system may go out the window. More often
then not though (and it is the case with this trader) they
pyramid losses. What this means is that they
constantly keep adding to losing positions in hopes that
they were originally right about the trade and they will
be able to make huge profits. As you can see the
effect is most often the exact opposite.
As a trader you should know to only add to your winning
positions. I would think if you were going to let
someone else trade with your capital you would want to be
sure that they knew this very basic rule.
At the time of this writing this particular trader
has over 20 systems up and running with more
than 500 people trading his signals. Under 20% of
his systems are winners over all and I suspect within a
short while that number will drop to 0%. Adding to
losing positions in part of his system. Its only a
matter of time before this fatal flaw catches up with
him. Make sure that you're not around trading
signals like this when it
finally does.
When you see a graph that looks like it goes in a pretty
steady up trend (below) with few major draw downs
you have probably found a trader that is at least worth a
closer look. There very well may be other reasons
not to trade this particular signal provider, but at
least now you have a trader that you can stick in your
demo account and gather more information.
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