What Are Forex Signals?

Last Updated July 23rd 2021
5 Min Read

Forex signals are tools intended to simplify the complex decision process that traders have to constantly face in the forex market. It is not easy to navigate the nebulous world of forex trading even as you try and identify the right opportunities and avoid any pitfalls. 

In the digital era, signals are usually electronic inputs containing recommendations based on data and trends. These are disseminated through digital formats like SMS, social media and email. The immediate nature of the information shared means that signals are mostly real-time and are integral to the actual trading process. 

The Types of Forex Signals

Forex Signals can be classified in multiple ways depending on the package cost, automation levels and usage type. 

Free or Paying

Most forex signal providers offer both free and paid models. Entry level and  small-time traders prefer to work with the free model that usually comes with a limited number of signals for a period of time.

Others still are the freemium kind with a trial period thrown in the post which users are expected to pay. These can be either a one-time charge or a subscription fee for a period. 

Manual vs. Automated Signals

Forex signals essentially are recommendations based on data and trends. An expert and seasoned trading professional can manually create these. Or these can get generated by a sophisticated software that processes available data and trends and churns out automated signals.  

Automated signals may not carry the baggage of human indecision and the second guessing that typically happens. But, it may occasionally miss the sixth sense and intuitions that a seasoned trader possesses. 

Trade Position Type

Trades can be either entry or exit into or from a position taken. It is important to get the decision right on both as timing your entry into a position and exiting it correctly can determine profits and losses.

Two types of trades – entry and exit – are done using informed and studied decisions that depend on trends and available data. Signals for short term and day trades often carry both entry and exit recommendations. But for longer-term trades, you can select from only entry or exit signals. 

Meaning of Common Signals 

As discussed above, there can be various types of signals used for each trade. While they are broadly related to entry or exit (or even both), each signal has a specific purpose. 

Action: As the name suggests, there is a call to action here that can be an outright “Buy” or a “Sell”. 

Take Profit: Here, a “Take profit” signal is shared at the point where a predetermined level has been attained for a position taken. This is a trigger to exit the position and make a sale that results in a profit booked. 

Stop Loss: A Stop Loss, on the other hand, is a signal raised when a bottom level from a position taken gets breached. It is an alert to curtail the loss amount decided and aims to restrict further damage from happening. 

Current market price: This is a non-activity signal and is more of an update or a piece of information shared on the prevailing price. Unlike the other signals, this just serves to give a perspective of the situation. The CMP is more of a comparison tool that helps a trader be aware of the price movement vis-à-vis his order. 

How do Forex Signals Work?

Forex signals are basically informed recommendations that work with two concepts. One, they collate past information that is usually the performance of the markets and its components and the trends they portray. Two, they also look at the present situation and analyse it to come up with projections for the future. 

Manual signals derive the benefit of the experience and expertise of professional traders and analysts to come up with recommendations. The automated ones too draw heavily from human intelligence that processes data and overlays it on a well constructed algorithm to generate near perfect signals. 

Deciphering a Forex Signal

Signals are briefly worded and often carry abbreviations and jargon. An aspiring trader who wants to try out signals would need to be comfortable with the format and content used. 

A signal could read something like this:

BUY GBP/USD at CMP x.xxxx – SL x.xxxx – TP x.xxxx

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

What are Forex Signals Based On?

Forex signals are based on the analysis of fundamental and technical indicators.

Fundamental indicators: Some of the fundamental indicators include:

Technical indicators: Some of the most commonly used technical indicators include: 

  • Candlestick patterns 
  • Fibonacci indicator
  • Head and shoulders pattern
  • Divergence
  • Triangles and wedges
  • Elliot Wave pattern
  • Liquidity
  • Hedging

Selecting the Right Forex Signals Provider

Forex trading can be lucrative, when the going is good, but risky when decisions go wrong. Sure, forex signals can be a great tool that you can leverage to take the right positions and exit them correctly.

To make them work for your overall forex trading goals, it is imperative that you find the right signals consistently. This is why you will need to identify a dependable source for those much needed gems of wisdom or the signals. 

Of course, finding the right forex signal provider can be easy enough with some good online research. But first, it is good to understand the fundamentals to find the right partner. The right forex signal provider should:

  • Be a certified broker
  • Have a healthy success rate
  • Have a robust software
  • Have a trial period assessment
  • Have the ability to customise

Are Forex Signals Right for You?

Everyone who trades wants to make the right decisions and take the right positions. There is no doubt that forex signals are quite useful in this regard for anyone who is either a beginner or is not yet at the professional level.

This is understandable as the traders who are low on experience and understanding of the forex market can certainly benefit from recommendations coming from experts. Manual or automated, signals can make the difference between profits and losses. 

But forex signals can, surprisingly, work for even experienced traders and find favour among them too. For them, a signal can do the work of crosschecking their decisions and reassure them. Also, these can be a good way of keeping their expertise and instincts always sharpened and in good shape. 

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