Anyone new to trading forex will almost certainly have come across different offers for ‘forex signals’. Even those who have been trading for some time and have never used signals will likely still have the open question as to whether they really bring value and how to go about choosing a provider from among the many options available. In this brief overview we will take a look at:
- What are forex signals?
- The role of signals in a forex trading strategy
- How not to use forex signals
- Choosing a signals provider
What are forex signals?
Forex signals, or trading signals more generally, are pretty much what they say on the tin and ‘signal’ suggested trades that can be replicated. A signal will highlight a time slot during which a trade entry point and exit point are suggested. For example:
EUR/USD From: 15.04.17 12:00 to 15.04.17 16:30 Buy at 1.0621 Take Profit at 1.0647 Stop Loss at 1.0527
A signal such as that in the above example should be based on analysis conducted by one or more experienced traders.
The Correct Role of Signals in a Forex Trading Strategy
Signals, as the name would suggest, highlight a trading position opportunity. They are not a sure fire winning position as even the best traders open plenty of losing trades. Being a successful trader is defined by making consistent profits from the combination of all trades made over a period of time. This is achieved by of course having strong expertise in fundamental and technical analysis and being able to pick out winning entry and exit trading points. However, it also about being able to correctly spread risk and take enough positions to even out the averages and compensate losing positions which will inevitably be made.
Doing the analysis to pick out trades takes time and the role of signals is in doing a lot of the groundwork for a trader by bringing potential openings to their attention. The trader should then do their own further analysis on the ‘signal’ and come to their own decision on its merits. This means that it is important for a trader to choose a signals system based on a form of analysis they both understand and fits with their own trading strategy.
How Not to Use Forex Signals
Forex and other trading signals are not designed to be blindly followed as a ‘mirror trading’ system, where the trader simply executes every signal provided. Misuse of trading signals in this way is common, especially among beginner traders. The technical and fundamental conditions originally analysed to give rise to a particular signal can change after the signal is provided and make the context no longer relevant. A trader using signals smartly will appreciate this and use signals for trade ‘ideas’ only, still fundamentally relying upon their own strategy and analysis.
Choosing a Signals Provider
There is a significant choice of different signals products of widely varying quality available online. This raises the question of how does a trader chooses the right one? As with anything, research is key. Make sure to find out what other users are saying about a particular signals service. As already mentioned, it is also key to choose a signals service that has an approach that fits in with your own trading strategy and is based on a form of analysis you understand.
One question often asked is whether free signals systems are ever as high quality as a paid service. This very much depends upon the context. Signals are always provided for a reason. If it is a subscription service it is a basic case of providing a product with market value that traders are willing to pay for. Free systems are not provided out of the goodness of the provider’s heart. They will most commonly either be used as a hook to attract clients to another paid service or as a value-added service provided by a broker.
In the first instance there has to be a strong question mark over the likely quality of the signals but in the latter the broker will be paying for the signals and then providing free access to their users, so the quality may well be reasonable to very good. Again, you should still research what others are saying about these signals as well as doing your own analysis before choosing whether or not to take a position highlighted by a signal.