How to Read and Understand Forex Trading Signals
When you choose to engage in forex trading, you’ll quickly come to understand that it pays dividends to make use of any and every tool that is made available. What these “tools” should do is help push forward your trading strategy, improving your output, and effectively helping generate further profit. Looking at what could very well take your forex trading efforts to the next level, forex trading signals happen to be something that no active trader can really afford to ignore.
Giving you a quick definition, signals are electronically transferred titbits of information that you can receive via email, SMS, text, and—in some circumstances—even via social media platforms. What this information often represents is critical need-to-know data related to the market. In many ways, a signal is an on-the-fly update that you can incorporate into the forex trading decisions that you make.
Forex signals are often issued via a dedicated forex signals trading service. Through these services, you’ll have a choice to make, as you can choose to implement signals either automatically or manually. Automated signal trading really gained momentum during the late 2000s, with it certainly being popular among novice traders. The advantage of heading down the automatic signal-trading route is that it enforces unemotional trading, along with increased execution trading speed. The downside is that you are putting faith in a service, system, or individual and pretty much taking the decision-making process out of the equation – or at least minimising it.
Manual signal trading is something that those with more advanced-level forex trading experience tend to throw plenty of weight behind. The reason for this is that it puts the final decision in the hands of the trader, with the human intelligence factor still having a role to play. You do forgo speed (and possibly even efficiency) when you opt to manually trade forex signals, but for some, that’s a worthy sacrifice for increased control.
Types of Signal Services
While many signal services will share some similar credentials, they aren’t one size fits all by any means. From our own experience, we’ve found that a signal service will take on of the following four forms.
- Free or unpaid signals, usually coming about through a voluntary service.
- Paid or purchased signals from a provider that delivers such through either algorithmic or personal analysis.
- Paid or purchased signals that will be derived from cumulative signal systems or sources.
- Signals (purchased or otherwise) that come from trading software that is located on a trader’s computer, this type of signal will be commonly listed as either an Expert Advisor (EA) or forex robot.
Common Signal Types
There is a multitude of different forex signals out there, so it certainly pays to understand what each signal means. Here are four common signal types that any active or prospective forex trader should commit to memory:
- “Action” – This is a straightforward, call-to-action-style signal in most instances, with it often taking the form of a direct “Buy” or “Sell” statement.
- Stop Loss – The Stop Loss signal represents an exit point, which is designed to protect your investment. Detailed by a preset price, what the signal will do (when automated) is pull you out of a trade before losses begin to ramp up.
- Take Profit – Acting as the opposite of a Stop Loss signal, a Take Profit signal can be triggered once a profit level hits a set rate.
- Current Market Price – Not all signals represent a direct call to action, with some being a notification of information. A Current Market Price (CMP) focused signal will help you compare the price of the currency pair at the time of signal issue with the actual price at the time of submitting the order.
Reading a Forex Signal
Moving forward, before you take the jump and start using forex signals and forex-signals trading services, it would be great to have a grasp on a realistic signal to get a further understanding of what it all means. While signals may take on different text and graphical forms, the content from most providers should generally be issued to you along the same lines. For example, you may see “Sell USD/CHF at CMP 0.9309 - SL 0.9334 - TP 0.9278”. Breaking down this signal, you’ll find that the call to action within the signal is to “Sell”, with the pair in question being “USD/CHF”. The “CMP” is listed at 0.9309, with the dictated “Stop Loss” being 0.9334 and a “Take Profit” level of 0.9278. As you can see, in spite of the abbreviation, and number-heavy nature of any signal you receive, actually understanding what it means isn’t all that complicated.
Before You Use a Forex Signal Service
Using a forex trading signal service is easy, you simply sign up, before copying the information into your trading account. This idea can often lure some into believing that reading, using, and understanding forex trading signals are a quick-fix approach to the market. This simply isn’t the case, while reading a simple signal can serve you with a bite-size instruction, it doesn’t negate any of the risk related to a trade. Before you opt to use a forex signal service you should know the following:
- Understand the difference between forex signal providers – No two forex signal trading services are identical, as you’ll find that they range massively in quality. Success rates for signal services vary from the high 60% range to something much lower, with there being plenty of “dud” systems around. Don’t read every forex trading signal service the same; instead grasp what exactly it is you’re signing up for before you commit.
- Understand your risk tolerance – Forex trading – due to its level of volatility and leverage – presents risk. Thus, it’s possible to lose major amounts of capital in a flash. Popular trending pairs, such as the XAU/USD, can experience wild swings. So before you read into any forex signal you receive, you need to understand how comfortable you are with the related risk level.
- Understand the market conditions – Emotionless advice is generally what forex signal will provide. However, this doesn’t provide an excuse for not understanding the market in front of you. Learn about the current market conditions and the limitations before you act on a forex signal.
When you choose to trade forex, what you need to do is grab every available edge. In the eyes of most, the biggest edge anyone can receive in this market comes in the form of forex signals trading. The reason for this is pretty much clear—especially if you’ve kept up with the information above—as they represent the missing link between staying on top of market conditions and lagging behind the most active traders around.