How Do Forex Trading Signals Work?

Last Updated July 23rd 2021
7 Min Read

Forex trading is all about determining whether to buy or sell a currency pair at any given time. 

As a forex trader who is starting out, how do you figure out the right forex trading opportunities at the right moment? How do you improve your trading performance, magnify the possibility of your profits and gain knowledge about the world of trading with currencies? 

This is where you need the help of forex trading signals.

What Are Forex Signals? 

Probably one of the most sought service by forex traders, typically for those who do not have enough knowledge of the forex markets; forex trading signals are electronic inputs that help you push forward your trading strategy, assisting you to generate more profit.

Forex signals are indicators that contain recommendations built on data and trends. Essential to the actual trading process, forex signals are received via digital formats like SMS, social media and email in real-time. 

How Do Forex Trading Signals Work?

Based on the automation levels, there are two kinds of forex signals systems – automated and manual. Let’s take a look at these.

Automated forex signals

Automated signals, as the name suggests, are systems created by programmers and code developers using several mathematical formulas with the help of professional analysts and traders. These systems are programmed to scan the markets and recommend trade ideas based on trends and data. 

For example, once the algorithm finds a trading opportunity to sell the currency pair GBP/USD, it will generate an alert which it will send to subscribers via specified communication channels.

Automated forex signals use technical indicators to analyse data on a currency pair. This type of signal is frequently used for placing short-term trades.

As automated forex systems do not leverage human intelligence and intuition, they are also known as forex trading robots or EAs (expert advisors). 

Manual forex signals

Unlike the automated ones, manual forex trading signals are generated by professional analysts and traders who conduct market analysis to identify trading opportunities. They also use technical indicators to recognise entry and exit levels for potential trading recommendations. 

A team of professional analysts and traders monitor the market 24/7 and study past information about the track record of a specific forex pair and fundamental indicators that could influence the price action in a forex pair.

Fundamental indicators include carry trade strategies, financial and political developments, market sentiment, and volatility that have an impact on a forex pair’s movement. Technical indicators include candlestick patterns, Fibonacci indicator, head and shoulders pattern, divergence, triangles and wedges, Elliot Wave pattern, liquidity and hedging.

Manual vs. Automated signals 

Automated systems can perform faster trades and offer signals on a wider range of instruments when compared to a manual signals system. However, the disadvantage is the lack of human judgment and the inflexibility of a computer system.

Common Signal Types

Given below are four common signal types you need to know.

Action: This signal type represents a call to action and means to “Buy” or a “Sell”. 

Take Profit: A Take Profit signal is sent to subscribers when a pre-set level is reached for a position taken. You need to exit the position and make a sale that results in a profit booked. 

Stop Loss: A Stop Loss, in contrast, is a signal sent to safeguard your investment and control further loss from happening. 

Current Market Price: Unlike the other call to action signals, the Current Market Price is more of an update or a piece of information shared on the prevailing price. 

Decoding A Forex Signal

A forex signal is a very short message with a few essential components and reads like this:

BUY AUD/USD (x.xxxx) @ Entry Price x.xxxx – Stop Loss x.xxxx – Take Profit x.xxxx

The recommendation is to make a buy on the two currency pairs at the prevailing market price as mentioned after the Entry Price. Also displayed are Stop Loss and the Take Profit prices.

Choosing A Forex Signal Service

There are many providers offering forex signal services. As a trader, you should understand what to look out for in a service before zeroing in on a provider. 

Free vs. Paid Forex signals

Some forex signal providers offer signals for free, unlimited or for a trial period, while others may require a monthly or yearly subscription fee for their services. 

Free forex signals: These forex signal providers will require you to sign up with a partner forex brokerage firm. In some cases, the free signals are limited, and once you need an unlimited number of them, you may have to pay a fee.

Paid forex signals:  Forex signal providers offer trade alerts on a monthly or yearly fee basis. Forex signal providers charge on an average from $75 to $150 per month for unlimited forex signals.

Forex signals are sent in the form of an email, SMS’s, RSS feed or through a pop-up software system on your desktop or laptop or via live charts. Some provide forex trading signals via WhatsApp, Signal, Viber, Telegram and Skype. You can choose your preferred communication method.

The right forex signal provider should:

  • Be a certified broker
  • Have a robust track record of success 
  • Provide live forex signals
  • Have a powerful software
  • Provide end-to-end technical support and customer support - email support and phone assistance
  • Have a free trial service
  • Have the ability to customise to include your preferred trading style
  • Not hide trading history

You should also consider the positive ratio of the signal provider. Also, check for a forex signal provider with a reliable success rate. When it comes to choosing the best forex signal provider, make sure it has a minimum of 100 positions. 

Read More: Top 7 Forex Trading Signal Services

Why Are Forex Signals Important For You?

Forex trading signals, be it automated or manual, are created by the best traders, analysts and brokerage companies. They spend hours and hours analysing the markets, using fundamental and technical analysis and use the most advanced algorithms. 

Forex trading signals can help you make the decision whether you want to make the trade or not. Forex signals are useful for beginners as they allow them to make decisions without spending time doing market analysis and help them learn the basics of forex trading step by step.

And for the experienced trader, forex signals can improve their trading skills and strategies and can let them check if their trading strategies are accurate.

If you have entered the world of forex trading, you already know how significant it is to get accurate information and make the right trading decisions. A bad trading move can be significantly detrimental while a good one can bring tremendous profits. That’s why trading forex signals are so important.

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