Forex signals can allow traders to operate in a more informed and efficient manner. But what exactly are forex signals and how do they work?
Currently, it’s thought that as many as 70% of forex traders lose money on a regular basis, and this is on the conservative side! Others estimate that the number is as high as 90% when using instruments such as contracts-for-difference (CFDs) whilst trading using forex brokers, for example.
First of all, I have to warn you that while there are no quick fixes available to completely negate the risk of loss in a volatile market, especially one as risky as forex. My guide is here to help you spot the indicators for movements and to provide you with some tools that should enable you to plot a safer and more managed course.
See also: Forex trading platforms
What are Forex Signals?
In simple terms, forex signals are alerts regarding forex that contain real-time and insightful trading recommendations.
These recommendations can help individual forex traders identify which currency pairs to trade, when to enter the marketplace and whether they should buy or sell the asset in question.
What’s more, forex signals can provide an insight into the estimated profit that can be generated by following specific ideas and recommendations. Of course, it is entirely up to you whether you make use of the advice on offer and actually follow the recommendations.
For example, while some traders will exclusively follow the recommendations provided by signals, others use them as part of their trading tool-kit to help create a deeper and more in-depth market analysis and based on this date will have their own unique trading strategy.
Ultimately, you’ll choose how you utilize forex signals, but optimizing their impact requires you to gain an innate understanding of what they are and how they work in practical terms.
OK, So How Do Forex Trading Signals Work?
Ultimately, there are two types of forex signals systems; namely automated and manual. Automated signals are the most popular among traders, primarily because these are predetermined by professional market analysts in conjunction with skilled code developers.
These signals will use algorithms to trade ideas and concepts based on historical trends, which in turn demonstrate deterministic market movements. Because of its automated nature, this type of signal will also use technical indicators to observe and quantify recommendations, particularly their likely viability.
These signal systems are typically referred to as forex robots or Expert Advisors (EAs), as they completely eschew human interaction in favor of proven mathematical formulas when discovering patterns.
Most novice traders tend to default to using automated systems. This is in part thanks to their minimal input in terms of the signal’s parameters and technical indicators, which is great as it enables individuals to execute the optimal number of orders based on their strategy.
If you’re a slightly more advanced trader, automated systems also enable you to customize the associated spreads and currency pairs in play, creating the ideal meld between mathematical insight and your own investment experience.
In the case of manual forex trading signals, such entities are generated by professional traders based on their own fundamental market analysis and use of technical indicators.
This will typically include examining past data pertaining to the price and trend in a chosen forex pair, with indicators and tools selected based on your underlying trading strategy.
However, the main difference between manual and automated signals refers to the next step, as analysts who put out the former signals also tend to study breaking and real-time news events (commonly referred to as fundamental indicators).
This can have a direct impact on price action in a specific currency pair, while the combination of fundamental and technical indicators can create far greater insight pertaining to future market movements.
Forex signals in summary
Ultimately, the type of forex signal that you use will depend on an array of factors, from your experience and risk profile to the underlying strategies used to trade the market. In any case before deciding on the signal that is best for you, I would strongly advise you to “shadow” the signal for a period of time, if possible. In essence add it to your trading tool-kit for a period of time in order to accurately gauge its performance and the value it brings to you. Not all signals are equal, and even incredibly robust forex signals will have certain preferences and strong points, and therefore by extension are also likely to have some weak points.
What’s clear, however, is that forex trading signals are highly insightful and valuable, so they should definitely be incorporated into your wider investment plan.