Understanding Forex Trading Signals: How do they work?

Understanding Forex Trading Signals: How do they work?

In Forex trading, it’s important for investors to know how to read signals. Forex trading signals serve as signposts or indicators of when/how to act on a particular currency. For instance, they’re like investment emojis; they come in a variety of designs, from bear/bull designs to geometric shapes, and can bring attention to important currency details.

So why should an investor know how to read these things? For the same reason drivers have to learn how to recognize road signs: if you don’t know what the signs mean, your interests could end up in a bad wreck. This article will focus on trading signals in Forex, what is it and how it works.

forex trading signals infographic

What are Forex Trading Signals?

Forex trading signal systems are used by Forex traders all over the world to help them make critical decisions about their trades. They’re one of the most important tools a Forex trader has. Also, almost all traders choose to use them in one way or another.

Forex signal systems can be either manual or automatic. Manual systems involve a trader sitting at the computer screen, looking for signals and interpreting whether to buy or sell. An automated trading system, on the other hand, requires a trader to instruct the software being used to look for certain signals and how they should be interpreted.

Both automated and manual day trading signals are available for purchase on the internet. An investor can obtain Forex signals from specialized companies and top Forex brokers, generally at a low cost somewhere between $5 to $10 a day and more for monthly rates.

Trade signals can also be combined with fundamental analysis to give investors another weapon in their stock trading arsenal. In volatile markets and/or with high-beta stocks, using trade signals can be invaluable to investors. It’s not only to point out promising opportunities as they appear but also to signal when they may disappear.

What Do Forex Trading Signals Do?

Forex trading signals serve as ways to analyze what a Forex trader uses to determine whether to buy or sell a currency pair at any given time. Forex signal systems can be based on technical analysis charting tools or news-based events.

For Forex day traders, a trading signal system made up of many different symbols could be used to help a trader make the best decision. With that, it should be based on the amount of information they can acquire. Forex trading signals can be found for free or a fee, and many traders make use of both.

How does a Forex trading signal work?

Every Forex signals system is unique and relies on a different analysis of the market. But overall there are two main methods which guide the market experts who produce the signals. The first is a technical analysis of the market including all the past information about the price and trend available. The second depends on current events and the analysis of how they might affect the price action over short and long periods of time.

Some signal systems are based on an automated computer analysis of the market. An experienced trader teaches the automated system how to react to different events and the system produces the signals on its own.

This kind of system has a major upside. It excludes the negative effects of human psychology which might affect a human’s judgment. It also causes him/her to make a wrong decision. The downside is of course the loss of actual human judgment and the inflexibility of a computer system.

Charts of financial instruments with various type of indicators including volume analysis for professional technical analysis on the monitor of a computer. Fundamental and technical analysis concept.

10 Tips for Choosing the Best Forex Trading Signals Provider

Using a Forex signals provider can be exciting for some. For others, having used a Forex signals service already and met with some disappointments, one can get cynical about using such a service already.

This brings the question whether one should use a Forex signals service. It also prompts the question whether a Forex signals provider can generate profits or equity growth for you. Here is a few tips on how to choose a Forex trading signals provider.

Age of the Account

Seasoned traders will know that at some point in trading, a trader will no doubt undergo a winning streak. This is often followed by a losing streak. It takes a lot of experience to be able to maintain consistent profits when trading Forex.

Therefore, the first thing to look for when choosing a Forex signals provider is the age of the account. Start by looking at signal providers who have a track record of at least three years.

This will tell you the experience of the trader themselves who’s managing the signals. It will also show you how consistent the signals provider has been in the past three years of trading.

Money Management

Some Forex signal providers actually use a Forex cent account. A cent account, as the name implies allows you to trade in cents. This means that there is very little risk. Copying traders from a cent account to your real trading account with even $500 in equity can be a bad bet.

Pay attention to the trading equity of the Forex signals provider. In most cases, you will already know upfront on the ideal trading capital and leverage that you should use. This ensures that the lot sizes are appropriate. It will also ensure that your account is closely mirrored to that of the signals provider.

Understanding how the signals provider trades (based on their history) will give you a lot more insight. For example, signal providers typically trading in single lots. However, you might find someone scaling in or out of a position. The bottom line is that traders need to also focus on the money management skills of the signals provider and not just how much returns they generate.

The Broker Itself

Not all Forex brokers are the same. Therefore, you must make sure that the signals provider and you use the same Forex broker. This will ensure that the slippage and spreads will not influence your bottom line profits. The speed of execution also matters.

Using a different broker from the one the Forex signals provider is using can result in the target levels not being hit and so on. This can quickly translate to losing positions merely due to the spreads involved.

However, if you come across a signals provider that does a splendid job but trades with another broker, then you can always ensure to adjust your trade levels by considering the spreads to minimize losses.

See Also: 5 Top Qualities of a Forex Trading Broker

Don’t Fall for 150 pips Marketing Hype

It’s common to come across signal providers who advertise on the average number of pips they make. This can be a great way to attract gullible traders into signing up for the Forex signals service.

Instead of focusing on the number of pips a signal provider makes, consider the overall profits that they have made. Paying attention to metrics can also help. Drawdown is an important metric that should not be ignored when choosing a Forex signals service.

The drawdown will tell you the potential losses your account might make in pursuit of the profits.


There are different types of Forex signal providers. Some send the trades via SMS or email while others fully automate the process. You would just have to install an EA or a script to automate the trading.

Choosing one of the above is a matter of personal choice. Therefore, traders should explore these options very carefully. No matter whether you want manual Forex signals or automated signals, ensure that you always stay in control of your equity and the risks.

Forex trading signals to buy and sell currency on the chart concept. Buy and sell indicators for forex trade on the candlestick chart graphic design

Free Trial before Subscribing to Service

No one admits that they offer inferior services. Thus, you should expect every Forex trading service provider out there to praise and gold-coat their services. Others will try to entice you with ‘amazing’ discounts and other ‘favorable’ pricing strategies.

Experts advise that you should choose a signal service provider that offers a free trial period. This way, you can spot any flaw in the trade signal service. By the time you decide whether to subscribe to the service or not, you will be making an informed choice based on authentic information.

Available features

Before you decide to subscribe to any Forex trade signal service, you should ensure that the company you’re likely to settle for offers a detailed, clean, and neat signal performance data. The performance page must-have features such as stop loss, entry points, and take profits.

These features allow you to check all the aspects of the signal service and determine whether it’s profitable to subscribe or not.

Understand what motivates you

One of the most important factors you should consider when choosing a Forex trading signals service provider is what motivates you to follow the alerts. If you follow the trade alerts to profit from these signals without learning how to trade, then, you can follow the automated “black box” trade signals system that produces the alerts but offers no analysis.

But if you intend to learn how to trade and benefit from the trade alerts, then, you will want to find a trade signal service provider who offers top quality Forex market analysis alongside the trade signal.

Performance figures

Every Forex trader should understand that there is more to choosing a Forex trade signals than simply choosing the most profitable service provider. There are countless trade signal service providers who boast of astronomical performance data. Thus, they tend to lure in many new Forex traders. Actually, most of these companies have huge drawdowns and run very volatile, unsafe signal systems.

Before you pick any signal service provider, check the overall returns, average monthly returns, maximum drawdowns, and risk per trade.

Price and customer service

This might sound too obvious but most newbies in the Forex markets get tricked into paying expensive amounts of money to access some of the allegedly “high profit” signal systems.

Normally, such Forex trade signal service providers don’t focus on the success of the Forex trader. Instead, they focus on how they earn from the naivety of the new Forex traders. They also focus on those who haven’t mastered the art of Forex trading.

Apart from choosing a service provider that offers excellent trade signals together with analysis, you should also check the company’s customer service. After all, the client experience drives the success of any given service. Before you subscribe to any trade signal service, you should be sure that help is on hand.

See Also: 8 Effective Forex Trading Strategies in 2018

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