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What are Forex Signals and How Do They Work?

Currently, it’s thought that as many as 70% of forex traders lose money on a regular basis, with some estimates even putting this number as high as 90% when using instruments such as contracts-for-difference (CFDs) whilst trading using forex brokers, for example.

While there are no quick fixes available to completely negate the risk of loss in a volatile market such as forex, there are indicators and tools that enable you to plot a safer and more managed course.

These include so-called “forex trading signals”, which can allow traders to operate in a more informed and efficient manner. But what exactly are forex signals and how do they work?

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What are Forex Signals?

In simple terms, forex signals are systems that contain real-time and insightful trading recommendations.

These recommendations can tell individual forex traders which currency pairs to trade, when to enter the marketplace and whether they should buy or sell the asset in question.

What’s more, forex signals can provide an insight into the estimated profit that can be generated by following specific ideas and recommendations, while there’s tremendous flexibility in terms of how you utilise the advice on offer.

For example, while some traders choose to exclusively follow the recommendations provided by signals, others use them as part of a deeper and more in-depth market analysis with the aim of creating their own unique trading strategy.

Ultimately, you’ll choose how you utilise forex signals, but optimising their impact requires you to gain an innate understanding of what they are and how they work in practical terms.

OK, So How Do Forex Trading Signals Work?

Ultimately, there are two types of forex signals systems; namely automated and manual. Automated signals are the most popular among traders, primarily because these are predetermined by professional market analysts in conjunction with skilled code developers.

These signals will use algorithms to trade ideas and concepts based on historical trends, which in turn demonstrate deterministic market movements. Because of its automated nature, this type of signal will also utilise technical indicators to observe and quantify recommendations, particularly their likely viability.

These signal systems are typically referred to as forex robots or Expert Advisors (EAs), as they completely eschew human interaction in favour of proven mathematical formulas when discovering patterns.

Novice traders tend to prefer automated systems, which allow for minimal input in terms of the signal’s parameters and technical indicators and enables individuals to execute the optimal number of orders based on their strategy.

If you’re a slightly more advanced trader, automated systems also enable you to customise the associated spreads and currency pairs in play, creating the ideal meld between mathematical insight and your own investment experience.

In the case of manual forex trading signals, such entities are generated by professional traders based on their own fundamental market analysis and use of technical indicators.

This will typically include examining past data pertaining to the price and trend in a chosen forex pair, with indicators and tools selected based on your underlying trading strategy.

However, the main difference between manual and automated signals refers to the next step, as analysts who put out the former signals also tend to study breaking and real-time news events (commonly referred to as fundamental indicators).

This can have a direct impact on price action in a specific currency pair, while the combination of fundamental and technical indicators can create far greater insight pertaining to future market movements.

The Last Word

Ultimately, the type of forex signal that you use will depend on an array of factors, from your experience and risk profile to the underlying strategies used to trade the market.

What’s clear, however, is that forex trading signals are highly insightful and valuable, so they should definitely be incorporated into your wider investment plan.