Many traders opt to use forex signals since they wish to take advantage of the foreign exchange market, but don’t have the time to study the market and develop a profitable trading strategy.
This is the first of three hands-off methods a forex trader may consider. The other options are forex managed accounts and forex trading software.
In as much as forex signals are there to help the trader make informed decisions, they still have their flaws.
What is a Forex Signal?
By definition, a forex signal is a recommendation that can be made by an analyst, trading software, or a trading robot.
Forex signals contain key information required to enter a concrete trade on a currency pair, with a determined time and price.
Forex signal services do everything that a robot can do apart from the actual execution of trade entries.
Apart from using an automated program, a good trader can generate trading signals (at a fee) for other clients to act upon.
However, you should be careful for you may be paying for a trading signal that you have no idea on how it came to be, or how the analyst came up with it.
In the end, you will be relying on the analysis of a third party and not your own analysis.
In a typical forex signal service, which you pay for, the programmer will create sets of technical indicators and rules that the program will run on.
If the price action meets the requirements of the signal service, then a notification will be sent to the user, either through an email or a text message. The user will then decide on whether to take the signal and trade or just ignore.
Types of Forex Signals
A signal is determined by the function it serves or how it generally operates.
Two signals are permanently available in the forex market, and these are manual and automated signals.
1. Manual FX Signals
These type of trading signals require the user to sit in front of their screens and observe the market for a while, looking for signals and making a final decision whether to buy or sell a currency.
All the decisions made here are purely based on the trader’s interpretation, and this can be a time-consuming process.
A human trader has the ability to assess the market in a way that programs can’t.
A human can see when the market is moving unpredictably or awkwardly and avoid or pull out of trades.
Unlike programs, human traders have skills and experiences that aren’t just limited to programs and can, therefore, feel whether a certain trade will be profitable or not.
2. Automatic FX Signals
Unlike in manual trading signals, the trader commands the software to search for certain signals.
No human effort is needed, and as a result, the software automatically interprets the action to choose, i.e., whether to buy or sell a concrete currency pair.
Trading using automatic signals can be more accurate, provided the program has been properly completed by a professional.
Forex trading robots have the ability to process more information compared to the human being. This, therefore, gives you an opportunity to:
- Manage more than one currency pair at a go.
- Monitor all the charts throughout the day without missing out on any important updates.
In order to obtain information that will be of importance, a trader should only cooperate with companies that are willing to provide previously evaluated results.
Firms that validate their information are easier to trust compared to the firms or companies that do not give traders free trials and access to audited results.
How to Find the Best Forex Signals
How good or bad your forex trading signals are will determine your profits.
Because there’s not much skill involved in the application of these signals, the only important thing is in the selection of an FX signal. Before selecting a signal, always go through this checklist:
- The time zone. Find a trading signal provider that conforms to your time zone because you will want your FX signals to come in when you are awake. Otherwise, they’ll be of no importance at all.
- Sign up for free trials. The free trial period will give you a clue on the quality of service offered without having to pay in the form of losses incurred from bad signals
- Make comparisons. Do not stick to the first forex signal provider that you’ll like. Continue looking and comparing other forex signals that will suit your style of trade. Having compared different services, pick out the best.
- Be careful and keen with track records. Have a good look at the track record of your signals provider. Performance-wise, this will tell you everything you’ll need to know about the setup. Only consider track records that have been verified by third parties.
- Focus on yourself. Make sure the style of the FX signals fits your trading needs. Besides the two mentioned basic types, forex signals have a wide range of styles. There are short-term, and long-term signals and signals focused on intraday breakouts, among others. Profitability should always be your top priority. You will find it easier and more enjoyable to use signals that conform to your personal style.
- Full analyses. Always go for the complete package and ignore the low-effort signal providers such as those only giving you only the entry price. Always go for the signal provider that gives you the charts and proper market analyses as well.
- Anything extra offered. Whenever possible, opt for a forex signal provider that offers additional services. These services may be educational or social trading-oriented. For as long as you are dealing with quality trading signals, such perks can add a great deal of value to the setup.
Advantages and Disadvantages of Forex Trading Signals
Advantages of FX Signals
- Continuously watching the market throughout the day can be a bit of a challenge for most traders. Fx signals come in handy here as they simplify the trading activity. If you have confidence in the signals you receive, you will be able to concentrate more on your trading strategy rather than spending much time searching for new opportunities.
- Good forex signals reduce the inherent market risk. This is because traders are regularly updated on the fluctuations in the market. If the providers of the signals are professionals and understand the trading market well, the level of precision projected by the signals increases.
- Trading signals give traders the opportunity of learning and deeply understanding the trading market. Through analysis of your trading history and charts, you can be able to see how a good entry point is determined and investigate the factors that triggered the signal. There are quite a number of signals available in the forex market, some of them being free of charge whereas others require a subscription.
Disadvantages of FX Signals
- One of the disadvantages of trading signals is the scams that are present in the market that may look authentic. FX signals are supposed to be sent by a professional analyst or trader. However, you are not likely to know the real person behind the signals, and this makes accepting signals a risky endeavor. The only way to prove whether the signal works is by reading the transaction records and viewing detailed statistics of the signal provider.
- Free forex signals always attract the majority of traders, but in the end, do not present much value. Free signals are often generated by less experienced traders. Professional forex traders don’t share their signals for free, they prefer to be compensated in some way and this is when the paid subscription service comes in.
- As mentioned earlier, trading signals can be generated by automated signal software. This is not a reliable service as the signal software does not have the capability of effectively processing important data, and just like any other software, forex software can malfunction with possible system errors that lead to a misleading performance.