ipMonitor will always display the file watching monitor as green, should it be able to read from the file. The job of this monitor (in v8.5) is to parse the file and tease out useful information - which can be sent to administrators via the alerting system.
This v8.5 document describes the full length required to do this:
So, you're not doing anything incorrectly ... the monitor should be green. v9 offers enhanced directory and file monitoring. You're welcome to try it outon a test machine, or read more on it, by downloading an eval.