What are Forex Signals, and how do they actually work?

You’ve been trading for a while. You’ve watched a lot of YouTube videos and made your first big payout. Now, you’re finally ready to expand your portfolio in Forex. You realize that while it’s similar to other types of trading, but it’s not the same. In this guide, we'll walk you through what forex signals are and how you can use them to become a better investor.

What are Forex Signals?

Forex signals are guideposts that can help traders make better trading decisions at the right moment. Written in short messages, they are typically composed of a direction, the instrument, the price quotation. Through human analysis and automated algorithms, Forex signal providers such as traders, affiliates, subscription services and copy trading providers help new and experienced traders through signalling a trade.

Example Forex Signal

  • BUY GBPUSD @ 1.3739
  • SL @ 1.1950, TP @ 1.1160

However, it’s important to note that a signal doesn’t mean that you have to follow blindly. The first step is to always check the person or group giving the signal. You have to evaluate whether the signal is coming from a trustworthy source that knows what they are doing.

But who and why would someone with years of experience in trading Forex be giving away their signals and some do it for free? A lot of reasons.

Who Gives Forex Signals, and Why? 

Forex: Identifying Trending And Range-Bound Currencies

There are a few different types of providers of Forex Signals – affiliates, traders, subscription-based companies and copy traders. Here’s how they’re different:

Traders

Traders can be either amateur or professional people who have been historically successful with their trades. Some signals may be from experts looking to give back to their communities that have helped them succeed. Often, you'll get these signals from platforms like Telegram groups, Discord Channels, and even Reddit Forums.

Other traders are willing to give signals in hopes that you eventually join their mailing list. Through their email marketing campaigns, their goal is to convince you to pay for a subscription to their premium or paid communities.

Affiliates

Affiliates can be also traders, but with ties to Forex brokers wherein they receive a commission from when you either sign up to their platform or the trades that you make with their signal. Some less ethical affiliates may not care if you lose your money while trading, and only care if you sign up using their links.

While not everyone who gives forex signals is always correct, many reputable and experienced forex traders have spent several years and thousands of their own money to learn how to do better traders. 

Bear in mind that no matter who you follow, everyone who is sharing their knowledge for free always has some sort of agenda. Whether or not their tactics and trades are reliable and profitable for you will be up for debate. 

Subscription-based Companies

Subscription-based companies provide trading signals regularly for a monthly or annual fee. Most subscriptions cover several markets aside from Forex such as crypto, commodities, and indices, so they are great for traders who invest in more than just Forex.

One of the advantages of subscription-based companies is that they are relatively transparent about their earning historically. They regularly publish their portfolio's win success rates and average monthly gains, which helps build trust with their subscribers. Many subscription-based companies also provide free Forex signals for traders who are still on the fence about the value of their services.

Copy trading providers

This way of trading is a recent innovation that automates the Forex Signal experience. Copy Trading is when traders choose to automatically replicate the portfolio of other traders, every time they open a position. This is a great way never to miss a good opening price and to make sure that you make the best out of the signal.

While the biggest advantage of Copy Trading is that it can be fully-automated, it can also be its biggest disadvantage. When you copy a bad trader, you can easily lose more than you gain. Many copy trader providers try to avoid this by leveraging on social trading and investing in the training and development of trading professionals on their platforms.

READ: We've reviewed The best forex signals for you

Now that we know who gives the signals, it's time to talk about how Forex Signals work and make them work for you.

How do Forex Signals work?

Forex signals work through human analysis and algorithms. With this, you have the option to choose between a real, human trader who is trading based on experience and knowledge or an algorithm that spots trading opportunities through fundamental and technical analysis.

Most signal providers will likely use an algorithm because it can scan through multiple currencies, all the time. While humans can only look at so many numbers at once and need to eat, sleep and effectively spend time away from their screens.

However, there are still strengths in human analysis. Occasionally, there are still unexpected events outside what algorithms are set to take into consideration. Events such as deaths of political figures, or climate disaster that will affect economies and market conditions. Therefore copy trading is a very popular alternative.

To help you make better decision, here are three things that you should watch out for:

Things to consider when looking for Forex signals

After you’ve evaluated the right people who you trust to give signals, then you have to assess if the individual trades. You can do this by looking at these five things:

  1. The Risk-Reward Ratio – While no person is correct 100% of the time, having at least a 1:1 Risk to Reward is a positive sign.
  2. The Success Rate – Consistency is key. The best signal providers should have a reasonable success rate that is above 50%.  
  3. Losing Trade Rate – Each person will have their own tolerance for risk, so knowing that your signal provider shares the same appetite is ideal.
  4. Time Zone – A great signal is nothing when you’re sound asleep when it arrives. To get the signals when they’re most effective, be sure to choose a provider that sends them during your waking hours.
  5. Additional Benefits –Many signal providers provide other benefits such as social trading, copy trading, and learning tools that you can use to become a better trader.

Once you have chosen the right signal provider, the next step is knowing how to read a forex signal, before you can replicate on your own trades.

Parts of a Forex Signal 

Every Forex Signal will have three parts: a direction, the instrument, and a price quotation. Some signal providers will provide you additional information such as type orders, signal status, and explanations.

So, what do each of these terms mean?

Direction

A direction is a common term in any kind of trading. There are two types of direction: Buy & Sell. 

  • Buy – When a trade is signaled to buy, signal providers believe that this asset is expected to rise in value. Trading at a buy price, or opening a “long” position means that you are willing to buy above market price in hopes of profit.
  • Sell – In an event when forex signal providers recommend selling below the market price, you open at a “short” position. This works by borrowing underlying assets and selling them when they reach the market price.

Instrument

Forex deals with the foreign exchange of currency pairs. Currency pairs are quotations of currencies against one another. Despite having almost 200 currencies in the world, only a handful of them are traded on the Forex Market.

Here are the most common currencies that are being traded today:

  • US Dollar (USD)
  • Euro (EUR)
  • British Pound (GBP)
  • Japanese Yen (JPY)
  • Swiss Franc (CHF)
  • Australian Dollar (AUD)
  • New Zealand Dollar (NZD)
  • Canadian Dollar (CAD)

Every currency pair will be either one of three categories that determine their brokerage cost, volatility and general risk factors. Here's what they are:

The Three Types of Currency Pairs

There are three categories of currency pairs – major currency pairs, minor currency pairs and exotic currency pairs.

Commonly Traded Pairs | FX Australia
Commonly Traded Major Currency Pairs all include the US Dollar | FXAustralia.com
Major Currency Pairs

Major currency pairs are the most commonly traded out of all the types of currency pairs. All major currency pairs are traded with the US Dollar, the world’s leading reserve currency. Due to market liquidity, brokerage costs are often low, making major currency pairs easier to trade for beginners.

Minor Currency Pairs

Minor currency pairs, or cross currency pairs, are major currencies that do not include the US Dollar. This type of currency pairs include one or two currencies of the Japanese Yen, British Pound and the Euro. 

Exotic Currency Pairs

An exotic currency pair is a combination of a major currency pair and a currency of a less-developed country. Exotic currency pairs can have significant profits. However, they are more volatile and less technical with higher brokerage fees. This makes exotic currency pairs a higher risk trade than the previous two currency pairs.

While there are three kinds, the Major currency pair is the one that will most likely bring you the most forex trading growth. While you can still trade in Minor and Exotic currency pairs, many experts recommend that you start with the Major Currency pairs to get the most of our your time. Since Major currency is where most opportunities lie, many of the forex signals will focus on this.

What influences currency movements?

There are two main drivers for currency movements: central banks, and economic factors. Other factors include the time of day, current events and even natural calamities.

Because forex is such a big market, it’s difficult to track all of them at once. Many Forex traders actually decide to just choose one type of currency pair, and make good money from trading that pair very well. 

Price Quotation

A Forex Signal will always quote the entry price, which is the price that they recommend you to make the trade.

How to Make Money Trading Forex - BabyPips.com
Price quotations are made up of a base currency and a quote currency.

Forex quotations always use an abbreviation of currencies through the alphabetic code which uses the 1st 2 letters of the country and the 3rd letter that denotes the currency. For example, the United States Dollar is quoted as USD.

Type Order

While the first three parts of a Forex signal are always going to be available, quality Forex signals give accompanying type orders. Used by traders to stop trades once they have incurred either a certain loss or profit, they are vital to a profitable trading strategy.

Here are the different kinds of type orders you can encounter when using Forex Signals:

Stop Loss (SL)

Once you set a certain percentage of your capital that you’re willing to lose, a Stop Loss will automatically close a trade when you have hit that amount. An important feature to incur losses, it prevents you from profiting if your trade is stopped before the market bounces back.

Take Profit (TP) 

Take Profit is when your trades are closed at a price you’re happy with. When investing long-term, it is sometimes necessary to avoid being too greedy. It can guarantee that you always come out when prices are on top, and not be there when it drops.

Trailing Stop Loss (TS)

While not all brokers have the option to have a Trailing Stop, it can be an efficient tool to help you maximize value. It allows traders to cap their losses but not their gains. When the price moves favourable for a trader, so does the stop loss.

Because Forex is very much rooted in real economies, there may be times that manually closing trades will yield the highest amount of profit. Signal providers may not be able to spot quick events that may instantly change the prices of certain currencies.

Forex Signal Status

While not all Forex signal providers have signal status, it’s definitely useful to know how recent a signal is before you implement it. As entry prices change, the status affects how reliable a signal can be. There are three possible status to every Forex sign: Active, Get Ready and Closed.

Explanations

Some Free Signal Providers will not only reveal their signal but the thought process behind it. This often includes market analysis, news clippings, or other relevant supporting information that can help you understand how they make recommendations.

Conclusion

Forex Signals are a great way to remove all the fears from starting to trade Forex. They can help you understand the basics of Forex trading and the many factors that influence the ever-changing movement of currencies. 

However, Forex signals should always be treated as advice, not orders. Before copying any signal, there are two steps you must always do: try to evaluate it on your own and implement it first on a demo account before your actual account. 

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