Forex signal systems and forex traders have enjoyed a much higher profile since they moved into the app and YouTube domains. With $5 trillion traded on the forex markets every day, it’s no wonder that the activity has seeped into the public consciousness with a vengeance.
If you want to know more about how to understand forex signals before dipping a toe into the foreign currency exchange pool, here’s everything you need to know.
What are Forex Signals?
When someone describes themselves as a signal provider or FX analyst, it means they are a professional or novice trader who use forex signals to buy and sell foreign currency. These signals are basically trade ideas that indicate market trends in real time. To help them have instant access to the latest charts and market news, active currency traders use forex signals mobile device apps and software provided by FX brokers.
As with anything, there are good forex signal applications and ones that are only so-so. If it’s your first time getting to know how forex signals work, you should be alright using a free app to test your skills on a demo account in the beginning. Once you have a bit more experience, you can think about downloading a signals system for a monthly subscription fee.
How Do FX Signals Work?
There are two key methods that market experts use to produce the signals reflecting on the forex signals software:
- A technical analysis of the FX market
- Fundamental analysis of current events
Although every forex signals system is exclusive to the provider, and they rely on their own unique interpretation of the market data, the two main methods listed above will always be at the foundation of the signals. All the past information about trends and price are used to make a technical analysis of the market. Working in tandem with current and past prices and trends is the real time analysis of current events.
How fundamental analysis of current events affect the FX price action over both short and long periods of time is a crucial part of how to understand forex signals.
How Are Forex Signals Systems Developed?
Some signals systems software were developed from an automated analysis of the market made by a computer programmed by an experienced trader. It can react to different events, and then learn how to duplicate those reactions. A positive result of the programming is the removal of the unpredictability of human emotions. The negative side to this, of course, is the loss of human assessment and shrewd judgement.
A signals system collects data from trading analysts inserting their actions and decisions directly into a dedicated forex signals trading service. It translates these actions into buy/sell signals. These signals become visible to users who have subscribed to that specific analytical software program. You can even subscribe to YouTube channels that show the actions in real time.
With forex signals available as texts, SMS, email, and even on some social media platforms, they are rapidly becoming an extremely useful trading tool for anyone who doesn’t have the time to learn in-depth FX (foreign exchange) marketplace strategies.
Using Forex Signals for the First Time
Once you have established some forex basics in your mind, such as:
every day the trading patterns and influences will be different
markets are being constantly manipulated by smart money
you are ready to try a few practice trades. Begin by incorporating the data you receive from your electronic signals platform into how you would make a forex trading decision from this information.
Your trial period can include sending trading tips you have extrapolated from the data to friends and family, or simply keeping a journal of how you would have interpreted it. This will build up your confidence before you branch out for real.
Automated signal-trading became popular with novice forex traders about ten years ago. As FX signals are most often issued by a forex signals trading service, you can choose to implement the signals you receive manually or automatically. Automated signal-trading has the advantage of executing trades speedily, and also enforces unemotional data interpretation. The downside to using this system is that the human element is taken out of the decision-making process, as previously mentioned.
As a beginner forex trader, you probably won’t have any informed decisions of your own to form a judgment just yet. So, using automated signals for trading is a good way to learn the ropes in the beginning.
There’s a lot of buzz about copy (and paste) forex trading online. It’s something a beginner forex trader could implement while they get a feel for the markets. Also called mirror trading, auto trading, and social trading; it’s when technology is used to copy forex traders in real-time. Live forex investors or brokers with the most consistent performance (when considered over certain variables) are followed by beginner traders.
Choose your forex trading system provider wisely. The concept behind copy trading is a very simple one and easy for beginners to understand. You copy the live forex trades (signals) made by the forex trading system providers (live investors), and every time the system indicates a trade, you can copy/automatically replicate the trades they make into your own account.
What Types of Signal Services Are There?
Many of the signal services share similar credentials. However, some have been developed for seasoned professionals and others are better for beginner traders to understand. There are 4 of signal services from which to choose:
- Free/no monthly fee signals.
- Purchased signals from a provider paid to deliver a personal or algorithmic analysis.
- Purchased or monthly subscription signals derived from cumulative signal sources or systems.
- Signals purchased from software linked to a trader’s/Expert Advisor (EA) computer/forex robot
No FX beginner should venture into live action without first setting up a demo account. Demo accounts are similar to a dress rehearsal in the theatre. You get to experiment with a trading platform and the features it provides, with fake money.
A wide variety of online trading platforms offer demo accounts. You can access one from standard stock trading platforms, commodities exchanges, and foreign exchange trading venues. Companies are more than happy to encourage demo account experience. It allows the customer to practice their trading strategies risk-free before taking things live.
Common Signal Types for Beginners
Action: A straightforward “call to action” signal, most often taken as a statement to buy or sell.
Stop Loss: When you see a Stop Loss signal, it represents your exit point. Stop Loss means exactly what it says; it is designed to protect your investment. This signal is implemented by a pre-set price. When this signal is automated, it will pull you out of a trade automatically before losses start to ramp up.
Take Profit: A Take Profit signal is the opposite of a Stop Loss. When a profit level hits a set rate, a Take Profit signal is triggered automatically.
Current Market Price: Not every signal represents a direct CTA. Sometimes you will receive a basic notification of new information. A CMP or Current Market Price signal helps you compare the currency pair (see Intermediate Forex Trading section: Currency Pairs) price at the time of the signal issue, against the price at the time the order is submitted.
How to Read a FX Signal
Before you move onto intermediate FX Trading, where you will be using forex-signals trading services and FX signals in real-time, you should have a firm grasp on signal interpretation. Signals can take the form of graphs, charts, or text. Most providers will use one of these three formats to issue their information.
For example, what you are most likely to see on your demo account in 2019 would probably be, “Sell GBP/USD at CMP 1.2160 – SL 2200 – TP 1.2090”.
Breaking down this abbreviated signal:
“Sell” is the CTA call to action signal to sell.
Currency pairing is GBP/USD (Great Britain Pound and United States Dollar)
Current Market Price (CMP) is 1.2160
The dictated Stop Loss (SL) is 2200
The Take Profit (TP) level is 1.2090
The GBPUSD is one of the oldest currency pairs in the world, and at the moment it is very volatile because of the ramifications of the Brexit. This brings us to the next FX terminology a beginner should understand: go short, go long.
Go Short or Go Long
As you can see from the above chart, forex markets go up and down continuously. FX trading isn’t the same thing as investing in stocks, when stock market traders buy and hold on to shares in Fortune 500 companies and gold commodities. Trading FX gives you the chance to profit from reading the data from all the market conditions.
When you BUY a FX currency pair, you are going long. This is called taking, or moving to a long position, and is also the reason why major currency pairs are the best to trade. Favorite currency pairs are:
- EUR/USD (Euro linked to United States Dollar)
- USD/JPY (United States Dollar linked to Japanese Yen)
- AUD/USD (the Australian Dollar linked to United States Dollar)
- USD/CAD (United States Dollar linked to Canadian Dollar)
- GPD/USD (Great Britain Pound/United States Dollar)
- USD/CHF (United States Dollar/Swiss Franc)
Going long means you are speculating the base currency valuation to rise in comparison to the quote currency, and you can then sell it at the higher price.
So far, this is fairly straightforward to understand, but what if your plan is to profit from a falling market?
If you SELL a forex currency pair, then that’s known as going short. Taking the short position is when you want or need the base currency to fall in value compared to the quote currency, and then buy it back at a lower price.
Taking both the long and short positions can be done on a demo account. Any account will be showing a lot of volatility on FX markets in September 2019. The United States has labeled China a currency manipulator, and traders are debating the pros and cons of going short or long on the British Pound.
Because the yuan (Chinese currency) is not freely traded, the Chinese government limits its movement against the USD. The PBOC (People’s Bank of China) is not an independent entity, and must accept charges of government interference when it changes its valuation.
The British Pound has been one of the strongest currencies in the world for decades. However, the Brexit, coupled at the same time with a Sino/U.S. face-off has made FX traders unsure of whether to go short (sell) or go long (buy) GBP/USD. So, the news text you are likely to read in September 2019 would look something like this:
Short positions: 9% lower than yesterday, and 5% lower from last week.
Long positions: 3% higher than yesterday, and 4% higher from last week.
Any FX trader can extrapolate from the above data that GBP/USD prices will in all probability, continue to fall.
Intermediate Forex Trading
As you learn more and start to get a better feel for the forex market, you will begin to sense when it’s a good time to buy or sell a currency. For example, your news feed will announce Zimbabwe is experiencing a violent coup, and you will understand that the adjacent countries will have their currencies immediately depreciate in value. This is because in response to political strife, traders hedge off in case there is the possibility of it spreading.
Intermediate forex traders know when to enter into a FX position, while simultaneously selling or buying another currency. The most profitable FX positions are when strong currencies are paired up with each other, and the weakest currencies are paired. This is called currency pairs.
Currency Pairs: Have you noticed that the financial news is always announcing updates like, “GBP/USD (Great Britain Pound/United States Dollar) trades below 1.22 amid Brexit fears.” This is because the quotation of the two different currencies is relative to each other. The value of one currency is quoted or paired against the other. The currency that comes first in the pairing, GBP/USD, is known as the base currency, and the one that comes second, GBP/USD, is known as the quote currency.
Currency pairs compare the valuation of one country’s currency to another country’s currency. It’s an indication of how much quote currency is required to buy 1 unit of the base currency. The currencies are identified by the ISO currency code they are associated with on the international FX markets.
All traders use currency pair quotes when buying the one currency and selling another, but it’s not a simple swap. For example, when looking at a EUR/USD currency pair, the price of the Euro may cost USD $1.140. But the broker will usually quote two prices for any currency pair trade. The difference (or spread) between the 2 prices is received by the broker when the market is operating under normal conditions.
What Are the Disadvantages of Using Forex Signals?
It goes without saying that when you are using your own money in real-time forex markets, you should first check the forex signals system you employ is not a scam. Trading signals must be sent by a professional forex market analyst or trader. If you don’t have a clear idea of who or what is behind your signal provider system, any trade you make is a risk.
If you keep in mind that there’s no such thing as a free lunch, you will avoid free signals probably generated by traders with minimal experience. Sharing signals with a professional forex signals provider means paying for it.