Forex Signals - Frequently Asked Questions

When trading the forex markets, particularly if you are a novice trader, you will no doubt be looking for tools and techniques that can help you trade more profitably. Using the right forex trade signals in the right way can help you do that. But there are so many signals out there that it is sometimes difficult to figure out which ones will work for you.

So I've put together this short FAQ to help you find your way through the forex signal minefield and hopefully make a profit with your forex trading endeavours rather than a loss.

A forex signal, in its most basic form, is anything that indicates that you should be buying or selling a certain currency combination under a particular set of circumstances.

For example, the signal could be as simple as “buy US Dollars and sell Japanese Yen right now, regardless of price”.

Or it could be a little more complex, e.g. “buy UK Sterling and sell Euros if (and only if) the rate hits 1.0805 within the next 24 hours”.

Or it could be more complex again, with multiple dependencies, for example “buy UK Sterling and sell US Dollars if the rate falls below 1.5850 within the next hour, but only if the US Dollar is trading above 0.6850 Euros and if the US base rate is 0.25% or higher”.

Forex signals are generated in a variety of ways, some automated, some not. The forex markets existed long before computers came along. In those days, traders would generate their own signals by either following “fundamentals” (news stories), “technical analysis” (patterns on hand-drawn price charts) or “gut feel”. Or a combination of the above.

The only thing that's really changed since then is the level of automation. Very few people now draw their own charts because charting packages are ubiquitous and often freely available. But people still follow fundamentals and gut feel. And many of the technical analysis patterns used now (particularly the simple ones like moving averages and gap analysis) are the same patterns that traders were using 100 years ago!

Today, the majority of traders will use computer software that monitors prices and other data in real-time, performing all kinds of calculations before coming up with appropriate trading signals.

A forex entry signal is an instruction to open a position, whereas a forex exit signal is an instruction to close a position. Sometimes an exit signal is accompanied by an entry signal to open a trade in the opposite direction.

For example, say you are long US Dollars vs Japanese Yen. Not all software for generating forex signals takes existing positions into account but if it does, it might generate a signal to trade out of your position by selling USD vs JPY (hopefully realizing a profit in the process!) and then to open a new short position in USD vs JPY.

All traders are different. What might signify a buying opportunity to Trader A might signify a selling opportunity to Trader B. That's what makes markets!

The most simple forex signal applications will not take this into account. But many software packages for generating forex signals not only allow you a high degree of configuration to tailor the signals to suit your trading outlook (long term vs short term, high risk vs low risk, etc), but also allow you to keep track of your positions. The best forex signal packages will take all of this information into account.

If for example you are a short-term day trader, looking for multiple low-risk trading opportunities that allow you to quickly get into and out of a position during the trading day, you will be looking for different signals than a long-term trader who might be looking for buy-and-hold trending opportunities.

There are so many different packages to choose from that they are impossible to list here. So my recommendation is to talk to your broker, talk to other traders and read reviews of the various forex signal systems on the Internet. Be careful of false reviews pushing affiliate product links though!

That's the million dollar question! Yes of course you can make money by following forex signals and trading the forex markets, but you can also lose money. It's a zero-sum game, for every winner there is a loser. But by understanding what you are doing, trading with discipline and using signals intelligently, you will give yourself an advantage.

Good luck, and happy trading!