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Published On: Tue, Apr 4th, 2017

How to use Forex Signals

When it comes to tools that are used by Forex traders, none are quite as important as trading signals. These are able to aid the investor to make critical decisions about when to enter and exit a trade. 

While receiving Forex signals is the first step to successful trading, you have to understand how to use them effectively. Not all signals are equal and knowing which signals to use at the correct time can mean the difference between a profitable trade and others. 

Similarly, knowing which signal providers to use is as important as choosing when to trade. Many signal providers take very little care in analysing the signals that they forward on to their clients. 

In this post, we will dig into the different signals, providers as well as solutions on the market.

What is a Forex Signal

At its very core, a Forex signal is an indication whether one should buy or sell a particular asset in the current time. The trader can then decide whether they would like to enter the trade based on the signal provided. 

These signals are usually generated based on a number of technical indicators. They are either produced by a human technical analyst or “Chartist”. They can also be generated by computer software based on a number of rules and conditions chosen by the Chartist. 

The trader can elect the method in which they would like to receive these third party provider signals. These can either be through SMS, Twitter, a website or through a mobile App.

Human or Automated Signal?

Before you can start using signals when trading, you have to decide whether you are going to use human generated signals or whether you are going to program software to send you signals based on specific rules. 

Professional traders who have the most time on their hands as well as a large amount of experience choose to monitor their own manual signals. This involves the trader watching the markets the whole day and studying the individual charts. 

The trader will have to be well versed in most aspects of technical analysis as well as charting. He / she will have to know all about patterns, indicators, formations and trends. Although this does seem though it may require the most work, it could pay off in the long run. 

Of course, if the trader does not have enough time to monitor charts the whole day then they can turn to pre-programmed trading signals. What this entails is using signal software to monitor key price levels. Then, once a particular set of conditions are met, the signal is sent to the trader. 

Although this is quicker and can allow the trader to most effectively spend his / her time on the most pressing issues, there is always the risk that the software has generated an incorrect signal. 

Similarly, many people believe in the importance of a human eye on the markets. This is because on many occasions, the market conditions are not black and white. There are so many variables at play that it can be hard for condition based software to parse data. 

photo/ screenshot YouTube

However, if a trader was to use pre-programmed signals as an initial signal before examining the market with more clarity, chances of success can greatly be improved. 

Whether generating one’s own signals or using automated software, a trader has to be adequately experienced and skilled in numerous facets of technical analysis. A general history of trading as well as a solid grounding in forex education is essential.

Using a Signal Provider

Of course, a number of traders prefer to use signals that are generated from an external provider or third party. This is an option that is usually chosen by a traders of all skill levels. 

It could either be a solution for less experienced traders who want professional signals or it could be used by professional traders who want more perspectives on the signal that they themselves have observed. 

As is the case with individual trading, the trader has the option to receive the signals that are generated by a human or software signals that are pre-programmed by the provider and sent the trader. In a similar vain, human generated and automated signals have their various pros and cons when presented by a provider. 

An additional consideration that the trader has to take into account is whether he / she is willing to pay a premium for those signals that have the best track record of success. Although there are numerous services that offer free signals, these are often times less than reliable. As the old adage goes, you get what you pay for. 

This usually comes down to simple economics. If a signal provider produced profitable signals, they could either use those signals to trade the market themselves or they could sell those signals to other traders. Whether they decide on one of the two depends on the profit either generates. 

When a signal provider uses their own signals, they are making a profit on their account. When they are selling these signals to a number of traders, they are selling it as a service for a profit. No signal provider sees a benefit in providing free signals.

Conclusion

While it really comes down to the experience and available time of the trader as to whether they will use a provider, proper due diligence should be done. You should read online reviews and study the historical returns of the provider. 

Many signal services also offer free trials which could allow the trader to get a sense of how successful they would be. If the signals are being provided by a human, then have a chat with the trader and ask them about their strategy.

Signals are indeed one of the best tools in the trader’s toolbox. However, as with any tool the trader has to use it in conjunction with a number of other indicators in an all-inclusive strategy.

Author: Pankaj Deb

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