When you start forex trading, you will quickly see that it makes sense to take advantage of every tool at your disposal, perhaps including forex signals. But what are they and how to use them?
What is a Forex Signal System?
A forex signal system is a set of analyses used by foreign exchange traders to guide their forex strategy and actions. These signals are either based on technical analysis or news-based events and give you a hint on which currency pair you should buy or sell. Many day traders follow signals, which normally work with a continuous feed of signals or suggested actions to take. Forex Signals can cover currency pairs, commodities, or stock prices.
There are two types of systems:
- Manual: the trader will wait for email signals or Telegram app forex signals or signals sent out in some other way and place the trades him or herself. This allows the trader some discretion in which trades he will place, allowing him to ignore some signaks if he disagrees. It has the advantage of letting human intelligence in to the equation, which gives more control.
- Automated / Robots: A trading bot or algorithm places the trades automatically though software connected to the trading account. The algorithm then makes buying and selling decisions on its own. The main advantage of automation is that it relieves you from emotional trading, which can be a source of failure for some traders.
These signals can be communicated to you through various channels, such as email, SMS, text, and even social media platforms like Telegram. They are meant to be on-the-fly info to quickly incorporate in your trading strategy.
Different types of Signal Services
A Forex signal service usually take on the four following forms:
- Free or unpaid: these usually use more simple systems and come from a voluntary service. Quite often some signals are avaialble free with your forex broker.
- Paid or purchased signals: a provider does the work of analyzing and recommending actions in exchange for a membership fee. The signals data might come from professional technical analysis or automated through algorithms.
- Paid or purchased signals generated by cumulative signal systems or sources: a robot or human grabs information all around and synthetize them for the user. The difference with the previous option is that it is not generated by the provider.
- Signals from trading software: most trading software have a tab called "signals" or "forex robot". These can be either free or purchased, depending on the platform and the complexity of the signals.
The 4 parts of the trading signal to understand
Every signal typically includes 4 important bits of information the trader should understand, especially if he/she is to place a trade manually based on the signal.
- Action: This is perhaps the simplest one, a straightforward call to action which usually take the form of "buy" or "sell".
- Stop Loss: The stop loss is often overlooked by beginners, but this can be a fatal mistake. It represents an exit point designed to protect your investment. When automated, the signal will automatically stop the trade in a loss at a certain price level to prevent a bad trade getting worse.
- Take Profit: The take profit is triggered to 'take the profit' and close the trade when the trade reaches a certain price level.
- Entry price: This is most important bit - the price leve to enter the trade. This could be either the current market price - or a price above or below the current market price.
How to read a forex signal
As you know, there is always quite a gap between theory and practice, so we figured we would walk you through the deciphering of a forex signal. This will give you a better grasp on what a signal is and what it looks like in practice.
Signals can take on many forms depending on the service you are using, but by and large, they should look like this.
For example, you might see "Sell USD/EUR at CMP 0.9410 - SL 0.9414 - TP 0.9389".
Let's break that down shall we? In this example, the call to action is to "sell" with the pair in question being "USD/EUR". The CMP (Current Market Price) is listed at 0.9410, the dictated Stop Loss (SL) at 0.9414 and the Take profit (TP) at 0.9389. As you can see, while it may look complex, once you learn a couple abbreviations, it is really child's play.
Some things to keep in mind when using forex signals
There are no barriers of entry to using forex trading signals. Sign up, pay if you need to, and implement information in your trading account. However, this does not mean that signals can simply replace a good knowledge about the market.
Following them blindly is not a quick recipe to success - otherwise, everybody would do it. Signals can offer you quick info and interesting insights you might have seen but using them without second thought could be problematic.
First, you need to understand that all providers are not equal. Some can brag about a good 60% success rate, but others are much lower and others are straight up scams. Secondly, the forex market can be very volatile, which means that although you have the possibility to quickly make money on successful positions, you can also lose a lot in a heartbeat. Your tolerance to risk should also be considered. Finally, emotionless advice - signals - can be a very useful tool, but the signal cannot understand the entire market. A good market overview and understanding will have to be attained for you to really make profits on the long term.
Forex Signal System, in Investopedia
How to Read and Understand Forex Trading Signals, in Value Trades