What Is a Forex Signal System?

When you start forex trading, you will quickly see that it makes sense to take advantage of every tool at your disposal, perhaps including forex signals. What are these, though, where do you get them, and how are they applied in practice?

A forex signal system is a set of analyses used by foreign exchange traders to guide their forex strategy and actions. These signals can be based either on technical analysis or news-based events; in either case, they give you hints on which currency pair you should buy or sell. Many day traders follow signals, which normally come in a continuous feed of signals or suggested actions to take. Forex signals can cover not only currency pairs but also commodities and stock prices.

There are two types of systems:

Manual: The trader waits for forex signals to be sent to them via email, Telegram, SMS or some other communications channel (even including social media platforms) and evaluates their credibility and significance themselves. This allows the trader some discretion in which trades to be placed. Since signals don’t originate from a magical crystal ball, a wise trader will ignore some signals if they disagree. This has the advantage of letting human intelligence into the equation, resulting in more control and thoughtful positions.
Automated / Robots: A trading bot or algorithm places the trades automatically through software connected to the trading account. The algorithm, in other words, makes buying and selling decisions on its own, based on priorities and parameters defined by the human trader. The main advantage of automation is that it negates the influence of emotion, which can be a source of failure for some traders. Automated trading also allows on-the-fly info to be quickly incorporated into a trading strategy.

Different types of signal services

A forex signal service usually takes on one of the four following forms:

Free or unpaid: These usually rely on simpler systems and amount to a voluntary service. Many forex brokers and trading platforms provide some degree of market intelligence free of charge to their clients.
Paid or purchased signals: A service provider does the work of analysing and recommending actions in exchange for a membership fee. The signals data might come from professional technical analysis or be automatically generated by algorithms.
Paid or purchased signals generated by cumulative signal systems or sources: A robot or human scrapes information from all around the internet and synthesises it for the user. The difference from the previous option is that it is not generated from primary research.
Signals from trading software: Most trading software has a tab called “signals” or “forex robot”. These can be either free or purchased, depending on the platform and the sophistication of the signals provided.

The 4 parts of a trading signal to understand

Every signal typically includes four important bits of information the trader should get a handle on, especially if they prefer to place trades manually based on each new signal.

Action: This is perhaps the simplest part of the recommendation: a straightforward call to action which usually takes the form of “buy” or “sell”.
Stop loss: The stop loss is often overlooked by beginners, but this can be a fatal mistake. This figure represents an exit point designed to protect your investment. When automated, the signal will automatically stop a losing trade at a certain price level to prevent a bad trade from getting worse.
Take profit: The take profit level is triggered to realise profit and close the trade when it reaches a certain price level.
Entry price: This is the most important part: the price level at which entering the trade is recommended. This could be either the current market price, or a figure above or below where a currency pair is currently trading.

How to read a forex signal

As you no doubt know, there is always a significant gap between theory and practice. This certainly applies to the process of deciphering a forex signal. Hopefully, this brief explanation will give you a better grasp on what a signal looks like and how it is applied in practice.

Signals can take on many forms depending on the service you are using but, by and large, they should look like the following. For example, you might see: “Sell USD/EUR at CMP 0.9410 – SL 0.9414 – TP 0.9389”.

Let’s break that down. In this example, the call to action is to “sell” with the pair in question being “USD/EUR“. The CMP (Current Market Price) is listed at 0.9410, the dictated Stop Loss (SL) at 0.9414 and the Take Profit (TP) is 0.9389. As you can see, while the format may look complex, it is really child’s play to understand once you learn a couple of abbreviations.

Some things to keep in mind when using forex signals

There are no barriers to entry when it comes to using forex trading signals. Sign up, pay if you need to, and implement the flood of information in your trading account. However, this does not mean that signals can simply replace comprehensive knowledge of the market.

Following signals blindly is not a quick recipe for success – otherwise, everybody would do it. This source of information can offer you quick info and interesting insights you might have missed otherwise. However, using them without a second thought could be problematic.

First, you need to understand that all providers are not equal. Some may brag about a 60% success rate (which is pretty good), but others perform at a much lower strike rate, while a few are straight-up scams. Secondly, the forex market can be very volatile, which means that although you have a chance to quickly make money on successful positions, you can also lose a lot in a heartbeat. Your tolerance to risk should be considered carefully. Finally, emotionless advice – signals – can be a very useful tool, but no signal is capable of encompassing the entire market and the forces that drive it. A good overview and understanding of the wider context has to be attained if you really want to make profits in the long term.