What are Trading Signals And How Are They Generated?
Trading Signals came about as a natural innovation of the financial industry. They basically solve the most daunting activity any trader has to perform – to identify the right trading opportunities at the right time.
By definition, a forex signal is a trading idea or recommendation on a specified financial asset, to be executed at a predetermined price and time. No matter your level of trading skill and experience, trading signals can help you enhance your trading activities.
In addition, experienced traders have the chance to widen the scope of their profitability and experience using signals.
For new traders, signals are beneficial, as traders can make money while still learning about the markets and how to trade profitably. The signals can also help shorten their learning curve because, as they attempt to understand the logic behind any trade suggestion they receive, they can get full insight as to which trading options the signal is based upon.
It is important to note that, in a fast and dynamic market such as forex, a trading signal is only as useful as it is timely. This is because a signal can become untenable if a trader receives it too late.
To ensure traders receive relevant trading signals at the right time, providers send them to traders via convenient communication channels, such as SMS, email and push notifications. Some traders can also install platform add-ons to receive their trading signals directly on their trading platforms.
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Types of Trading Signals
There are broadly three classifications of Forex trading signals
Manual vs Automated Signals
This is a classification based on how trading signals are generated. Manual forex signals are generated by a person who can be a professional and/or seasoned trader.
On the other hand, automated trading signals are generated by computer software that tracks and analyses market price action based on coded algorithms.
Paid vs Free Signals
This is a classification based on the price of a signal service provider. Some providers offer free signals (this can be unlimited or for a trial period), while others require payment. Paid signals can be charged as a one-time fee or based on a subscription model.
Entry vs Exit Signals
This is a classification based on the level of detail of a trade suggestion. Some signal providers may provide only entry signals, which is a signal to open a trade position in the market, while others provide only exit signals, which is a signal to close any relevant open trade position you may have running on your trading account. This is mostly the case with long term trading signals on financial assets that trend for long periods of time. Usually, on short term intraday trading signals, a trade idea will contain both entry and exit signals.
Who are Forex Signal Providers?
As mentioned above, there can be manual and automated signal providers. Manual signal providers can be professional and/or seasoned traders, market analysts and strategy providers. They generate trading signals based on their trading knowledge, experience, fundamental and/or technical analysis skill or their developed strategy.
On the other hand, automated signal providers are computer softwares that are coded to generate trading instructions when certain set parameters or conditions are met in the market. Automated signal providers, such as Expert Advisors (EAs) and other types of trading bots, mostly apply technical analysis methods that rely on mathematical predictive indicators, such as Moving Averages, Fibonacci levels and Stochastics. There are a few that may be designed to implement fundamental analysis techniques, such as tracking economic news releases and market sentiment.
Depending on your trading needs, you may be served by either manual or automated signal providers, or even both. AvaTrade has agreements with third-party providers to deliver trading signals free-of-charge to traders daily and weekly in the form of market commentary and analysis.
Anyone with an MT4 or MT5 platform can access and subscribe to any signals provider on the page.
MQL5 allows virtually anyone to become a signal provider, but there are many functions to ensure you can subscribe to a provider suitable for your trading needs. MQL5 community evaluates the verified trading results of all signals providers and rates them accordingly. There are various sorting and filtering possibilities to allow every trader to select their preferred signals provider according to their percentage growth, maximum and minimum drawdown, as well as manual or algorithmic trading.
For further utility, MQL5 will display a warning sign on any signals provider that is yet to deliver an acceptable number of signals to determine trading quality or a new provider whose results may be of a random nature.
Trading Signals in Copy Trading
Forex trading signals were the precursor of copy trading. With forex signals, traders can decide whether to execute a trade suggestion or not, while with copy trading, a trader essentially mirrors the trades of a successful trader in their own trading account.
Copy trading is automated: you select a trader, and their positions will be mirrored in your trading account. There are, of course, variations where you can customise the trade size, assets as well as stop loss and take profit orders.
Copy trading is a valuable trading method that allows traders to earn profits from the market, even with limited trading knowledge. It also helps traders free their time as well as diversify their overall trading portfolio. Furthermore, it allows traders to choose a trading style that suits their risk tolerance and matches their trading goals.
At AvaTrade, traders can implement social trading strategies powered by both ZuluTrade and DupliTrade, two of the best copy trading platforms that boast the largest communities of traders in the world.
The platforms feature cutting-edge technologies that guarantee auto-mirroring of trade positions without human intervention. They are also user-friendly, rank only the best performers and are feature-packed with handy tools for risk management.
Should I Use Trading signals in trading?
This is a decision that will depend on your trading goals and ambitions. The main reason for this is that the inherent risk of trading signals is that your trading decisions are determined by a third party while you take full responsibility for the outcome of the trades. That is, if your trade ends successfully, you get to enjoy the full profits; yet if you lose a trade, the full loss is yours and not the loss of the signal provider.
To ensure you take advantage of the lucrative opportunity of using signals, ensure you apply the following tips:
- Choose the Right Broker
This is a no-brainer. A good broker will have a reliable platform that will ensure smooth execution of signals, and this is where AvaTrade takes centre stage. AvaTrade is a globally regulated broker with advanced, state-of-the-art trading platforms.
- Choose the Right Signals Provider
This is the most difficult part of using trading signals. A good signals provider will have a success rate of more than 60% that will ensure a steady account growth with minimal drawdowns. This means that providers with some history will generally be more reliable than new ones whose trading results might be skewed. AvaTrade 3rd party providers have a long history of providing quality signals.
- Trial Period or Backtesting
Before committing to a signals provider, ensure that you can ascertain their trading performance. Some providers offer a trial period, which ensures you only continue if you are impressed by its performance. For automated strategies, you should be able to perform back testing to observe how the software would have performed in different market conditions. It is also prudent to try out the signals provider on a demo account (for forward testing purposes) before putting real money on the line. AvaTrade offers an intuitive and easy to use demo account, so this is an excellent starting point.
A signals provider may not have the same investment objectives as yourself, which may mean that the signals provided may not be suitable for your trading account. Both ZuluTrade and DupliTrade have high customisation capabilities to ensure that you can align a profitable signals provider to your trading goals and ambitions, with reasonable risk.
If you understand that trading signals can boost your trading activities and accuracy, AvaTrade is here to make your dreams come true.
Forex Signals main FAQs
How can I get free forex signals?
If you go searching for free forex signals you’ll probably come up with a load of results, but unfortunately what you’ll also have is primarily a load of rubbish. The problem with free signals is that they often come from disreputable sources. Or maybe they are simply bad sources. Unfortunately, when it comes to something as potentially lucrative as signals, there are very few people giving away the good ones for free. If it’s worth trading on it’s worth paying for, and the signal providers know this.
What are the components of a forex signal?
If you’ve never seen one before you’ll think a forex signal is brief and basic, but there’s a load of information packed into those few lines of data. The signal begins with either a Buy/Sell designation after which the forex pair is shown. The pair might be shown with its designation such as ‘Cable’ or ‘Aussie’. At the end of the first line is the strike price. In some cases that might be it. Other signals could have a second line adding orders like stop loss (SL) and take profit (TP) targets. Some will even give trailing stop (TS) values, but this isn’t too common.
Who provides forex signals?
Anyone can be a forex signal provider as long as they are part of the Metaquotes Community. That doesn’t mean everyone will be a good forex signal provider. In general signal providers fall into three groups: traders, affiliates, scammers. The first group is the most trustworthy and reliable. If you find trader signals there’s a decent chance, they could be good in the long-term. The second group of affiliates are publishing their signals in hopes that you’ll click a link and create an account at a broker, for which they will receive a commission. This group might or might not be reliable, so be sure to investigate the signals and use with care. The last group of scammers are simply trying to use you in some way to profit themselves. They may try to get at your money in some way, or could just want something as simple as your email address, which they will then sell to others.
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