To become a successful Forex trader, you have to obtain lots of knowledge. Whether you like it or not, you will have to spend numerous hours reading voluminous literature on this subject. Practicing your skills on different demo accounts is also essential.
If you put in enough effort into learning, you will slowly but steadily become an expert in the field of Forex trading. Your profits will inevitably start to rise. But before you get there, you have to learn how to differentiate between the various types of signals available for the Forex markets.
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Signals are of vital importance for all serious traders because they facilitate informed decision-making. Once you master Forex trading with signals, you can be more than sure you are ready to open a live account.
In this article, we explain what Forex trading signals are as well as how to read and implement them. We tackle the most common types of signals you will encounter, their main benefits, and the factors you must consider before you start using them. Also featured is information on how to find the best providers of signals for Forex trading.
What are Forex Signals and How They Aid Traders’ Decisions
A signal can best be described as a recommendation on when to enter a specific trading position for a Forex pair, normally at a certain price and time. The suggestion can be generated by human analysts, trading robots or trading software.
A person or a program is constantly monitoring the markets to detect advantageous conditions for trading. Once the human analyst or the software determines the time is right to enter a Forex market, they alert the users of the respective signal service provider by sending them a signal. The signals also contain entry and exit points.
This means seasoned analysts or trading robots do all the hard work for you so you don’t have to. All you must do is open the signal they have sent into your Forex account and wait for the outcome. It is important to note that the entire process takes place in real-time.
The signals are sent to Forex traders via email, text messages, RSS web feeds or even as updates on Twitter. Some providers sent their signals via mobile applications like Viber and WhatsApp.
The bottom line is you receive the signal on time so you can make well-informed decisions about your positions. This obviously saves you time because there is no need for you to watch the markets like a hawk at all times.
How to Read the Forex Signals
Now that we have explained what signals are, we shall dish out an explanation of how beginner traders can read them. To start with, a signal normally contains the name of the tradable asset (a currency pair, an index, a stock, etc.), the direction of the position (long or short), and the entry level in terms of pips, i.e. where to go long or short.
The stop level tells you how to adjust your stop-loss order if the prices move in an adverse direction. The target indicates how you should adjust your take-profit order provided that prices move in a favorable direction.
Of course, the exact information signals contain varies between different signal providers. Some offer more detailed information and include extra commentary in their signals. Below are two examples of free signals for the USD/CHF and the GBP/USD pairs. The GBP/USD one is for a long position and the USD/CHF is for a short position.
|USD/CHF signal||2 hours 52 minutes ago||GBP/USD signal||2 hours 10 minutes ago|
|From||GMT+02:00 14:19||From||GMT+02:00 15:26|
|Till||GMT+02:00 16:42||Till||GMT+02:00 17:02|
|Sell at||0.977||Buy at||1.2923|
|Take profit* at||0.9749||Take profit* at||1.296|
|Stop loss at||0.9799||Stop loss at||1.287|
To break things down further, you can clearly see the call to action the signal recommends for the USD/CHF pair is to Sell (Buy for the GBP/USD pair), with a dictated Stop Loss of 0.9799 and a Take Profit level of 0.9749. Respectively, you need to open a short position for this currency pair when its price approximates 0.977 pips.
Sometimes the Current Market Price, abbreviated as CMP, is also included. The CMP is not always featured for the simple reason it is to be understood traders should buy or sell a given pair right after the signal was issued and should do so at the current market price.
However, the CMP can be useful if one receives the signal with a small delay. This way, you get the chance to compare the current price when the signal is issued with the pair’s actual price at the moment you submit your order.
As you can see, reading Forex signals is not as complicated as it initially seems despite their number-heavy nature. Whether or not one uses Stop Losses and Take Profits largely depends on their trading style, strategy, and above all, experience.
Seasoned day traders sometimes refrain from setting such parameters. They rely on their in-depth knowledge and trading experience to determine the right time to stop a trade.
The Stop Losses and Take Profits help Forex novices build consistency and make better-informed decisions. A beginner should never adjust these parameters on the fly because this would interfere with their trading strategy’s methodology.
Manual Forex Signals
This type requires traders to spend long periods behind their desktop screens. They search and analyze different signals to arrive at a final decision on whether to go long or short with a given currency pair.
One such decision is largely influenced by the individual person’s interpretation of the signals. Obviously, this approach can be extremely time-consuming and is mostly suitable for full-time traders who possess enough know-how and skill to assess the markets accurately on their own.
An experienced trader is capable of analyzing price movements in a way that software programs simply cannot. A human being can sense when a market is moving in a weirdly and unpredictable manner, and therefore, would handle their positions accordingly.
Humans’ assessment of the Forex markets is not limited to codes and programmable settings only. Experience traders prefer manual signals because they allow them to fine-tune their strategies according to the current market environment.
Automated Forex Signals
Automated signals gained great traction among Forex traders in the early 2000s and are particularly beneficial for those who are new to the markets. This signal format is basically what its name suggests it is. Here there is no need to analyze market conditions and seek out signals manually.
Instead, the Forex trader instructs a piece of software or a trading robot what signals it should search for. Such is the case with the MetaTrader software and its Expert Advisors (EAs). The EAs are basically trading robots, capable of automatically generating Forex signals and interpreting current market conditions in real-time. They would open or close the traders’ positions accordingly.
There are also semi-automated signals where favorable trading opportunities are only highlighted by the software. However, it is up to the human trader to determine whether or not to enter the recommended positions.
Automated signals have two main advantages. First, they completely eliminate emotions and stress that could negatively impact the decisions of humans. Second, using them saves traders a good deal of time.
There is no need to stay chained to your desktop computer for extended periods, scouring for Forex signals to base your final decision on. A trading robot is capable of processing significantly more information than a human being and in less time.
In turn, this enables traders to manage multiple currency pairs at the same time and monitor their charts around the clock without missing out on any important signals. Nevertheless, combining manual with automated trading is probably the best course of action. Many well-versed traders prefer to utilize a hybrid of the two.
The Most Common Forex Signals
There are different types of trading signals but the three main ones we would like to pay attention to are day-trading, news, and positional signals. We briefly explain them in this section so make sure you get the idea. Which one you decide to use depends on your style and what trading strategy you intend to implement.
The first type of signal is the positional signal. This one is mainly suitable for position trading where traders’ positions remain open for prolonged periods of time, days, weeks, even months. The main idea here is to try and profit from long-term trends on the Forex market.
Such traders assume that once a given trend begins to manifest itself, it is likely to continue in the future. Such trend followers usually base their decisions on technical or fundamental analysis, but can use a combination of both at times.
Number two on the list are the Forex day-trading signals, which are the polar opposite of positional signals. These take advantage of the current market momentum on a daily basis. Using such signals can help you boost your profits in the short-term.
Obviously, day-trading signals are updated multiple times within the span of 24 hours. With them, you are able to predict more accurately short-term fluctuations on the market and make an informed move.
Another type of signal is the so-called news signal. Many people do not pay enough attention to those but the truth is news are one of the most powerful weapons you can use when it comes to Forex trading. Let us tell you why.
As you know, the financial markets are severely influenced by important economic events, which can greatly impact price movements. For this reason, you have to follow the news and subscribe to different newsletters.
Take a look at different economic calendars to keep track of the most important events in the field of finance as they can lead to serious spikes in currency pairs’ prices. New trading signals rely on this knowledge and can be very profitable to those who use spike trading strategies. Below are the parameters Forex signals commonly contain:
- The “Action” is easily the most straightforward parameter of a trading signal. It simply tells you whether you should enter a long (Buy) or a short (Sell) position.
- The “Stop Loss” (SL) is a parameter that indicates the exit point of a given trade. This is basically an exercise in damage control, designed to protect traders’ investments in case of unexpected adverse market movements. An automated signal would directly close the position at a predetermined price before your losses start to ramp up.
- The “Take Profit” (TP) parameter is practically the opposite of the Stop Loss. The position is closed down, either manually or automatically, when a trade has reached the profit level recommended by the signal.
- The “Current Market Price”, or CMP for short, is another common parameter you are likely to come across when trading with signals. It is worth pointing out not all Forex signals are direct calls to action. Some merely convey important information. The CMP parameter facilitates the comparison between a currency pair’s price at the moment when the signal was issued with its price at the time of the order’s submission.
Who Provides Forex Signal Services?
Forex signals are offered by brokerage firms, dedicated signal providers or professional traders who analyze the markets on their own. This is usually a paid service although some brokers and providers also offer signals for free. In certain cases, you may be charged extra to receive signals for exotic, rarely traded currency pairs.
Sometimes the signals are supplied by preprogrammed robots (Expert Advisors) within a piece of trading software. In MetaTrader 4, for example, you can attach no more than one EA robot to a single chart. Nonetheless, it is possible to run over a hundred EAs within the same trading terminal as long as you open an individual chart for each Expert Advisor.
Some signal providers prefer using human analysts to prepare their signals while others rely mostly on software and robots. However, trading parameters are still entered into the software by human beings. If the analyst changes the values for a specific currency pair, this would cause the software to look in a different direction. Respectively, the analysis’ results and the signal’s recommended parameters would also be different.
The second approach is not without its advantages because, unlike human analysts, trading robots are devoid of emotions. A robot will never enter into a trade out of greed or close a position before due time because of fear.
Many of the largest Forex brokers in the industry treat their customers to free signals, sparing them the hassles of having to pay to third-party signal services providers. However, this service is typically available only to clients who hold live accounts and maintain them active.
In addition to signal access, major brokerages offer a host of other useful features. Here are some of the services that are usually provided:
- Stop Losses, or exit points, on one or more currency pairs
- Graphs and chart support
- One-on-one coaching
- Account management
- A trial period for signals, either at no cost or at a lower price
- Different educational resources
- A complete trading history that will help make your analysis more accurate
Main Advantages of Implementing Signals in Forex Trading
The use of signals when trading Forex comes with several advantages, especially when one is a beginner. First and foremost, signals allow you to expand your knowledge and sharpen your Forex trading skills. With their help, traders can deepen their understanding of the markets and learn about new trading strategies.
Signals facilitate quick learning because they give you a good idea of how price fluctuations affect your investments. Observing how more experienced traders enter or exit certain positions is particularly useful to beginners.
Many novices trade Forex pairs on the side and have regular jobs. This makes it impossible for them to remain chained to their computers throughout the day. Signals enable such people to save time and effort when it comes to market research and analysis.
There is no need to spend hours on end to study charts and graphics before you arrive at a final decision. The signals will alert you when conditions have ripened for a specific currency pair. You can gain more exposure to the Forex markets by replicating the positions of successful traders.
Diversification is yet another advantage of using signals. With so many signal services providers out there, it is easy for traders to learn about different styles or strategies and use them to expand their trading portfolios.
Additionally, the use of signals significantly minimizes risks and helps you make informed decisions. After you develop your skills sufficiently, you can even sell your own signals to fellow traders, generating extra earnings in the process.
3 Factors to Consider Before You Start Using Signals
Many beginners assume using signals is a quick fix for success but this simply is not the case. Signals provide important information about the markets but cannot entirely negate the risks associated with foreign exchange trading. Several factors bear consideration before you start using the services of signal providers.
- It is essential to understand no two signal providers are created the same, with some offering higher-quality services than others. The signals’ accuracy can greatly impact one’s overall results.
Certain providers include only basic information about the call to action along with the TP and SL levels. Others deliver detailed charts and commentary that could prove to be of further use to traders. The bottom line is you need to figure out exactly what you are signing up for before you resort to the signals supplied by a given provider.
- Interpret the market conditions on your own. It is important not to forget that signals are merely recommendations. Using them is no excuse for the absence of a proper understanding of the market environment. Take the time to inform yourself about current market conditions and their limitations before you act on the signals you receive.
- Give a thought to your individual risk tolerance. Foreign exchange trading is a volatile venture, even more so when one does it on margin with leverage. There is always the possibility of losing large amounts of capital in two shakes of a lamb’s tail.
The huge swings inherent to pairs like XAU/USD, for example, can wipe out your entire balance in a flash when you leverage your positions. A trader should take some time to evaluate what risk level they are comfortable with before they act on a trading signal.
Finding the Best Signal Providers for Forex Trading
As we said earlier, you must approach signal services providers with caution. Some of them are not as reliable and accurate in their predictions as others. Do your research with due diligence and consider the following criteria before you make a pick.
- Ensure the signals offered by a given provider correspond to your individual needs and trading style. Traders who implement scalping strategies would be more comfortable with a service that provides scalping signals. A position trader, on the other hand, is more likely to prefer a service that sends them long-term signals. Check what number of trades the respective provider sends out per day. A larger number typically indicates the provider relies on short timeframes for market analysis and would be more suitable for short-term traders. If a few signals only are sent during the week, you are probably looking at a long-term signal service where the recommendations are also based on fundamental analysis.
- The time zone is another key factor that bears consideration. Short-term signals should be acted upon as soon as possible or else they would be of no use. If your signal provider of choice hails from a different continent, you will end up receiving notifications while you are fast asleep. Short-term signals are practically useless if you fail to get them on time.
- Pay attention to the provider’s track record. This will give you an accurate idea about the quality of the service and the provider’s performance. Compare and evaluate different options before you make your pick. Factor in their overall success rate – a provider whose signals are accurate 80% of the time is better than one whose signals win 50% or 60% of the time. Reading feedback from other signal users can also prove beneficial.
- Consider the availability of additional services. Some providers only dish out basic information about their signals, such as entry/exit prices and SL/TP levels. The signals of others are accompanied by additional market and chart analysis.
This gives traders more confidence because they can see what exactly the signals are based on. The charts usually contain important support and resistance levels the recommended SL and TP are based on. This information can significantly boost your learning curve and assist you on your path toward becoming an independent trader.
- Check for educational materials like free webinars, training videos, regular market outlooks, news, and watchlists. The availability of such material indicates the signal provider cares about the people who subscribe to its services.