graziani: The way i would define and implement signals.
i'll try to be short :)
Lets define terms i need to explain my concept:
1) "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative." (Graham)
2) Risk of a financial transaction is a percentage of invested amount of money you are ready to lose. When this
percentage is reached, transaction is exited regardless of any other factor
Signals should be divided in speculative and investment categories. So, if a system (signal) has defined, verified and specified:
1) entry criteria
2) exit criteria (either target or event or both)
3) risk of individual transaction
4) risk of the system
then this signal can be treated as investment, otherwise it is speculation (in other words: pure gambling)
So a signal provider has to confirm points 1) & 2), and specify values for 3) & 4), and at that point his signal can be treated as investment.
To verify the quality and truthfulness of a provider, and to compare signal performance, we measure:
1) Growth in % on year basis
2) Duration of signal providing
3) maximal relative drawdawn of single transaction (%) ->
3) risk of individual transaction
4) maximal balance relative drawdawn (%) -> 4) risk of the system
Other:
1) Other compere criteria can be used, but clearly is less important
2) Leverage limitation can be droped: the adaptation of lot is done through risk of individual transaction
3) More security for signal providers should be given: signals should not be visible within first day (perhaps less)
4) Only server signal copy allowed (so only server copies the signal)
etc
WELL said and written, Thanks for your great contribution. Recently my broker uses this to calculate gain (for accts that are submitted for competition). The growth is calculated based gained over the capital that was risked at that point for that transaction. Eg if that trnx is 1 lot=USD250 and regardless of lot sizing, the pip gain was USD100 (@ 10pips for eg), then growth is computed as Profit/Loss($)/risk $. Thus if u had opened then tranx at 2 lots, the same 10 pips gained would have double the P/l($), BUT the gain% would be the same, coz of the computation as the risk$ would have been very much higher at higher lot sizes.
I believe this sort of growth% should be used and reported against the MT4/5 statements used to present a provider's profit & loss