A trading signal is a notification to a market participant for entry into a specified position, either long or short, into a specified market asset (i.e. GBP/USD or USD/JPY), that is provided by a service via the internet, email, text message, or social media.
Forex signals providers vary amongst one another with respect to the information that they provide and how the trading signals are derived. Some providers will only provide an entry price with a profit target and a stop-loss price. While others provide much more information including trade size, risk management, and scaling in and out information.
In general, Forex signals can be categorized in two main ways:
- The style of the trading strategy for which the signals reflect.
- How a trading signals provider generates its signals.
Types of Forex Signals
Trading styles include scalping, swing trading, and trend following just to name a few. A scalping strategy will send out signals that attempt to capture small quick profits from short-term price movements. There will be multiple trade signals per day for each asset traded and signals must be executed immediately in order to avoid slippage (deviation from signal price).
Swing trading (synonymous with momentum trading) seeks to capture profits from larger price movements. There will be less signals per day and trades may stay open for multiple days. Broker swap rates become an important consideration and drawdowns may require more capital. For this style of trading, slippage is not as significant a problem but can be if left unchecked.
Trading signals for trend following strategies rely on capturing and capitalizing on large market moves and are long-term in nature. Trades may last several weeks or even months. Signals to add size to open positions and to scale out of winning trades are usually included. Broker swap rates are definitely an important consideration and drawdowns can be significant during periods of non-trending markets.
How Forex Signals are Derived?
The types of analysis typically used for generating signals may include technical analysis, fundamental analysis, and news.
The methods used by signal providers may include using sophisticated automated trading algorithms that are developed and maintained by professional quantitative traders. These types of signals usually rely on technical analysis and work better on short-term scalping and swing trading. Fundamental analysis is better suited for long-term macro analysis that seeks to predict long-term market trends.
Another method used by Forex signal providers is to simply copy successful professional discretionary traders that perform analysis and makes trading decisions “on the fly” based on experienced and knowledge. As long as the traders providing the signals are consistently profitable, the Forex signals that are generated will satisfy the needs of the provider subscribers.
The Perfect Match
It’s important that the signals provided by the trading signals provider align with the style and method that the subscribing trader is familiar and comfortable with. Otherwise, when trading begins, unfamiliarity may lead to a level of discomfort that may cause an inexperienced trader to deviate from the Forex signals, and potentially result in unnecessary trading losses.
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