Trading forex is an exciting and potentially lucrative endeavor. However, it can be difficult to learn the ins and outs of the financial markets.
So, we’ve put together a quick guide that will help you learn how to trade forex successfully.
In this post, we’ll discuss the different types of forex trading, what forex tools to use, and how to read forex signals. So let us begin.
Forex Signals
Forex Signals are detailed analyses done by expert analysts to aid forex trading. This analysis is done to know the right time to enter trades in real-time. Signals have a very short-term window and may remain relevant for not more than a few minutes; however, when a trader uses it rightly at the right time, they stand to make successful trading decisions that will churn in a profit.
Signals are analyzed based on currency pairs which have to be executed at a particular time for a predetermined price. If you are new to trading, you will find signals to be very helpful for making the right trading decision. Even if you have a little bit of professional trading experience, forex signals can be quite helpful too. You can make a good profit at the start of your trading journey while gaining invaluable experience at the same time regarding different trading strategies and world currencies.
Forex Signals are only effective when used at the right time
As good as forex signals may be, they are only useful if you use them at the right time. This is especially true if the market is highly volatile and experiencing extreme price swings. This is why traders wait in anticipation for a signal to be launched or utilize it as soon as it is recommended because they don’t want to miss the window. Also, signals are sent out as early as possible before the time slot arrives. A late signal may be hard to implement, leading to potential trading losses should the trader try to implement it in a rush.
Method of transmitting signals
Signals are received using different mediums such as emails, SMS, and push notifications. If you trade on a reliable platform that offers a signal service, you may subscribe for it and receive them via the platform.
The different types of forex signals
There are different types of forex signals services. If you search the online space, you will find different types of signals, but for this article, we will review the most popular ones used by many novice and professional traders.
Automated/Manual Signals
Signals are generated using two types of tools, an automated tool using analysis bots and a manual signal using the physical knowledge and interpretation of trading data. For manual signals, the analysis is done by an experienced trader with deep experience in the forex market. The analyst analyzes market conditions, news, the relationship between two currency pairs, and several other data before making a trading prediction in advance.
For automated signals, all analysis is done by computer software and trading bots. The software analyzes price movements using a certain ingrained algorithm. Both methods have their pros and cons. For example, manual signals cannot analyze a large body of data that software can, while automated signals do not factor in human elements when it comes to trading. However, automated signals are based on a large body of data and provide traders with speedy trade execution.
Entry/Exit Forex Signals
Another type of forex signal is the entry/exit method. This type of signal focuses on the entry and exit points when executing trades. If you use this type of signal service, you will be alerted to the best time to enter the market and when to close your position and exit the market. This signal type is one of the easiest to use, particularly for novice traders, but it is not ideal for long-term forex trading.
Paid/Free Signals
Then we have signals based on the monetary value, which is the paid and free signal service. As the name implies, a paid signal is based on a subscription model. To use this type of signal, you have to pay for it. Operators that offer paid signal services charge users a monthly, quarterly, semi-annual, or annual subscription fee, depending on their service model. On the other hand, an operator that offers a free service releases signals to users without requesting payment for it.
Note that a paid or free signal can either be an entry/exit signal or a manual/automated signal, or a variation of the two.
Forex Signal providers
A Forex Signal service provider may be a manual or an automated service. Manual signal operators are a group of highly experienced forex traders with a deep knowledge of the market. They know the best time to enter the market and the right time to exit. They also know when to avoid trading completely so as not to sustain losses. Two analysis models they use are fundamental analysis tools and technical analysis tools. However, some manual operators may rely on automation from time to time; however, they mostly rely on their trading skills to make speculations which they communicate to their subscribers.
Then we have service providers who rely on trading software to generate signals that they broadcast. These providers work by designing software to transmit a given message or react in a certain way if certain market conditions are in play short term or long term or are going to be in play.
Also, some operators rely on human judgment, technical expertise, and a combination of trading software to generate their signals. Some even go as far as reviewing the signals of several operators before analyzing them and ranking them in terms of accuracy based on predetermined parameters. Using such a signal service is often the best course of action, but they’re often expensive. At the end of the day, it is in your best interest to use a signal service with a high success rate and one that suits your trading style.
Things you should know before you use a Signal Service
There are certain things to bear in mind before you use a signal service. First, all signal service operators will tell you that their signals average an 80% or 90% success rate but what many will not tell you is that this is not true or that there are possibilities for potential losses. No matter how good a signal may be, if it is not used at the right time, it is useless. Secondly, no forex signal operator can guarantee you a 100% success rate. Any operator that claims to give traders a 99%-100% rate is lying.
With that out of the way, here are some things to note before you start trading with Forex signals.
Market conditions: Before you start using signals, you need to have at least an average knowledge of the forex market and how currency prices rise and fall. Knowing why the market reacts the way it does is important because signals, especially automated ones generated by bots, do not factor in human emotion when generating data.
Understand the signal: One mistake many forex traders make is that they trade based on the signals, but this is wrong. Knowing what the signal means is not enough. You need to know why as well. If you understand the “why,” your decision-making will be done with a high degree of clarity. This is even more true when combining signals. Even if both are making the same conclusion, you need to understand that they may interpret data differently, even if they predict successful outcomes.
Risk management: Even if the signal is telling you to enter the market, you still need to decide how much you are willing to risk and for how long. The signal will not make this decision for you. The decision is yours. Many traders go in with huge amounts because they believe their signals to be right, but at the end of the day, they lose all their money.
A good signal service may be right 6 out of 10 times, or in a best-case scenario, 7 out of 10. Very rarely do you see a service that is right 8 out of 10 times, especially when the market is highly volatile. This is why you should know how much you are willing to risk per trade before entering the market.
Forex Trading Tools
Forex trading tools are used by traders who trade with or without signals. If you plan to trade using signals, knowing how to use the various trading tools will serve you well. Here they are.
Charter: A Charter or charting software is an automated service for generating trading charts in different time frames. Many trading platforms use them, but they are generated externally. If you know how to read charts, your use of signals will make trading much easier.
Trading platforms: Some platforms are more advanced than others, but what makes a platform advanced? Advanced platforms have high-tech plug-ins and integrated software you can use to analyze the market at any time.
Financial News: News outbreak drives the price of currencies. One currency that has a greater influence on the market is the US dollar, followed by the Euro. For example, if the Federal Reserve Bank releases a statement that it plans to release billions of dollars into global circulation, this news alone will cause a reaction in the market because it will influence the value of the dollar. If you subscribe to a platform that curates forex-related news, the information you get from them can be used to make trading decisions.
Copy Trading: If you have found a signal operator and plan to copy their trades without making any alterations, you will need to rely on a copy trading tool or service. Copy-trading involves replicating an operator’s trade.
Correlation Matrix: You also need to study how one currency correlates with another and how a price action by one can influence the price of the other. This phenomenon is called a correlation Matrix, and they may be a single or a pair of currency matrices.
Keep an economic calendar: Keeping an economic calendar is a good idea since you can use it in tandem with the signal. An economic calendar is like a journal of major economic events for a particular year. Some of the data your journal should have include economic reports by major international financial organizations, reports and statements by central banks, economic indicators like interest rates, inflation rates, and unemployment rates.
Volatility calculator: A Volatility calculator is a special tool you can use to determine the volatility ratio of a currency. This tool relies on the historical data across different time frames, and it is done in pairs. So, if you know the volatility rate of a particular pair, you can determine how much you are willing to risk trading the pair.
How to read forex signals
When it comes to trading forex signals, you need to understand certain elements. All signals have the following
- The name of the asset
- Whether you are to go short or long in terms of direction
- Whether you are to go short or long in terms of the entry-level
- The point to place your stop loss to limit potential losses if the trade goes wrong
- The point to place your take profit if the signal is accurate
Now, for most forex signals, they will begin with a throwback to trading for the previous day and how the market closed. Then, the signal will provide you with relevant data to provide you with the best times and currency pairs to trade for the new day. It will also tell you where to enter the market and where to exit the market. Finally, it will show you how the market closed the previous day to help you understand how the market reacted to changes in currency prices.
Another thing to take into consideration is thr support and resistance levels. A signal will point out a predetermined support and resistance level using a chart. When you lock in the trade using the signals, you are to watch these levels closely during the period recommended by the signal to see if the price of the currency pairs you are trading reaches any of them. If the price reaches the predetermined resistance level after rising, what you do is to wait for a price drop or what is called a bearish move to enter the market. However, if the price reaches the support level identified by the signal, you look for a bullish turn to indicate that the price is about to rise.
The onus now lies on you to decide if
- You want to trust the signal
- You will remain in the market for a long or a short period.
Note that signals cannot be used in isolation but with a combination of trading tools and analytic tools like Moving Averages, Stochastic Oscillator, and Fibonacci charts. Also, trading instruments like the ones we reviewed in the previous paragraph come in handy.
Types of trading strategies
To conclude this article, here as some popular trading strategies you should know as a beginner.
Scalping
Scalping is one of the most popular trading strategies many forex traders use. Scalping involves going short in the market. To scalp, you only have to hold your position in the market for a very short time for a few seconds and not more than 30 minutes. Some scalpers even hold it for 30 seconds to a minute, and then they exit. Scalping will only earn you tiny profits, but if you are very good at it, you can accumulate profits in a single day by trading small volumes multiple times. To use this trading strategy, you need a very liquid market and tight spreads.
Best currency pairs: USD/JPY, EUR/USD, GBP/USD
Day Trading
This strategy involves entering and exiting the market on the same day. This strategy is for those who do not want to be caught by surprise when they are inactive. If you are a day trader, you will prefer to close your trading for the day at a profit or a loss. Day traders also rely on technical analysis to make trading decisions.
Swing trading
Swing traders are the opposite of day traders and are the best examples of traders who prefer to go long. A Swing trader can hold a position for several days or weeks. If you have a full-time job or you can’t sit in front of a computer for a very long time, this is the best trading strategy to deploy. You can analyze the market several days or weeks in advance using a manual or automated signal in conjunction with your personal trading analysis.
Position trading
Positional trading is another strategy that looks for market opportunities with the biggest profit potential. This strategy focuses on price shifts in the market that span over several days, weeks, or in some cases, years. Positional traders aim to identify exit and entry points in the market using their analytical skills and technical indicators. They also watch for price pullbacks and fluctuations in the market when making a trading decision. This trading strategy requires experience, so we recommend that you gain deep knowledge of the market before utilizing it in your practice.
Conclusion
Forex signals are market data that show you the best times to enter the market and the best currency pairs to trade. If you must use a signal service, make sure you do your due diligence when selecting a service operator so that you get accurate signals worthy of your investment.