The concept of a trading signal and its application in Forex trading
An urgent question for many traders today is the search for the optimal trading signal. The potential success of a deal may depend on various factors, and a trading signal acts as a trigger mechanism for buying and selling currency in Forex. The set of analytical data generated by the software allows the trader to make a well-thought and rational decision regarding the advisability of conducting a deal in Forex.
In this article, we are going to consider the concept of a Forex trading signal and its varieties, and also tell you how a trading signal is generated. After having read our review, you will be able to figure out when it is better to open and close positions in the currency exchange market, taking into account the events occurring on the exchange that can affect the profitability of your Forex trading. Thus, knowledge of internal market processes will increase the level of your professionalism as a trader.
Before Forex trading signals were developed and introduced into widespread use, traders had to engage in independent monitoring of the market in order to get enough information to make the right decision about whether to buy or sell currency and other assets at that moment. To date, studies of algorithms for the functioning of the Forex market have led to the creation of software for identifying Forex trading signals.
Now the trader does not need to personally analyze this information and make any conclusions based on the data obtained, since modern software performs the role of the best advisor in finding the source of a Forex trading signal or several signals at once. Automated help is based on the fact that artificial intelligence notifies the trader of the right moment to complete a deal in Forex. After that, the trader can either want to conclude a deal, or can deliberately refuse such a step.
Types of Forex trading signals
Now let’s move on to the types of Forex trading signals and let’s take a loot at some examples. There are several varieties of them, so it will be useful for a beginner to know their distinctive characteristics in order to better understand which of the types of Forex trading signals will be the most suitable for conducting profitable trading. The common ground for the best signals is the criterion in which a certain time period is created, where the price action will not be identical to the basic indicators.
Good situations
Let’s say that a clear example of a good signal is a situation when the market sells off on the wave of so-called news panic and aggression, but at the same time, fundamental information indicates the continued stability of this market. If a Forex trading signal indicates a «good trade» to a trader, then following this instruction can really bring tangible profits. Let’s consider the most popular types of trading signals. Among them the most well-known are the following ones:
- manual trading signals;
- automatic trading signals;
- trading signals through Forex software;
- trading signals by correspondence.
Features of Forex trading signals
A manual trading signal assumes that a trader spends a lot of time studying market indicators, graphs and charts, but for some reason, perhaps personal convictions, does not allow specialized software for Forex trading to do the same work. Only after analyzing all the necessary data, a trader comes to one or another conclusion. Often, experienced traders who are able to correctly interpret and group the incoming information are engaged in manual search for a trading signal in Forex.
Of course, now an increasing number of people prefer not to waste their time on such an analysis, but to entrust this complex computational work to automated Forex assistants. In addition, when manually searching for a trading signal, no one is immune from mistakes, and the trader’s perception of the conditions for a deal as beneficial in fact can be deeply wrong. Still, it is believed that an automated Forex trading signal operates on a more reliable principle, which can be trusted to a greater extent.
The best software for trading currencies and cryptocurrencies in Forex was created by experienced programmers who were able to find the optimal algorithms for finding a trading signal. Automated advisors have a very necessary option for any trader to study huge data streams, systematize them and come to the certain conclusions, which help to trade profitably in Forex with high accuracy. The human factor is completely excluded here, so emotions will not affect a trading bot.
Forex experts recommend periodically combining manual and automatic search for a trading signal, as this helps to develop your own analytical skills and better understand what circumstances can be currently called the driving force in Forex trading. Of course, a bot can find the best signal to enter and exit a trade, however, nevertheless, one should not overlook a certain percentage of the permissible calculation error.
Another type of trading signal in Forex is a signal by correspondence. In this case, there is social communication between an individual trader and the rest of the trading participants. With this interaction, traders inform each other about trading signals through correspondence in social media, through various applications and other written methods of data exchange. As a rule, the trader who sends these messages has the trust of his colleagues and has high authority among them.
How to create a Forex trading signal
Creating a trading signal when trading Forex is an important success component of the chosen trading strategy. For example, the Japanese candlestick chart and its hammer chart variation allow the trader to see the optimal time to open and close a trading position in Forex. In order for you to perceive this information correctly, we will list several basic parameters that form the entry point to a Forex trading signal. So, pay attention to aspects such as:
- moving average cross;
- diametrical extremes of trading sentiments;
- interest rates;
- market volatility;
- breakdown of a technical pattern;
- volume jump;
- the cyclical nature of trade;
- assessment of the market situation.
The overwhelming majority of traders have heard that in order to collect reliable data on trends in the Forex market, you need to track the indicators of moving averages for 50 or 200 days. If there is high trading activity when two moving averages cross, forming a cross on the chart, then this can serve as a trigger for creating a trading signal. Usually, under this set of circumstances, the purchase and sale of currency in Forex exceeds the average threshold.
As you know, there are such categories of traders on the currency exchange as bulls and bears. Bulls play on an uptrend and make a profit from selling a currency at its maximum price, while bears aim to sell assets at a minimum price and make a profit in Forex. In this case, the factor that creates a trading signal in Forex is the predominance of bullish trading, as this can be an indicator of market tops. Thus, a signal is formed on the difference in mood.
Factors such as falling or rising interest rates, as well as volatility can trigger the appearance of a Forex trading signal. Changes in the stock and currency exchange markets often affect the size of interest rates, and the peak values of volatility, in turn, lead to the fact that traders en masse decide to make deals in Forex. This is not surprising, given that currency trading is susceptible to any changes in the market, and this certainly creates a trading signal.
A breakdown of a technical pattern is also one of the factors that form a trading signal in Forex. Visually on the chart, it can look like geometric shapes: rectangles, triangles. An observant trader will notice changes in the head of the trend, that is, any combinations atypical for this pattern may indicate an imminent Forex trading signal. Perhaps, in the next few minutes, active trading will begin and the trader’s task will be to win.
A trading signal in Forex often arises as a result of a volume jump – a phenomenon in which too high a volume can precede a new trend in the currency exchange market. As for cyclicality (or seasonality), this feature of Forex trading is also trigger, as it contributes to the formation of a Forex trading signal. As a rule, a stable trend holds during the strong part of the year for trading, and decreases during the weak part of the year. From here, a trading signal is created, this is especially typical for stocks, although it can also be observed in the case of trading cryptocurrency in Forex.
And, finally, the last obvious factor influencing the formation of a trading signal in Forex is the assessment of the current market state. Again, if we consider the example of stocks, then an unjustifiably high valuation of their value compared to industry and market data also often leads to a trading signal to sell them. Thus, changes in market assessment may be a catalyst for the start of trading activity in Forex, and may lead to making a decision about necessity of committing a deal.
Summing up: should you trust Forex trading signals?
The trading signal itself is neutral when trading any market, either we imply the securities market or the Forex currency exchange. In order for a trading signal to be beneficial for you, you should pay attention to the signal source, who its supplier is, and whether this source can be classified as verified and reliable or not. In addition, it makes sense to resort to using software for automated search for a Forex trading signal.
It can be an expert advisor for Forex trading, which by its functionality can easily perform the most complex calculations in the field of technical analysis and find the best Forex trading signal for you, which will significantly save up you time and allow you to dedicate your energy to much more productive activities, for example, making profitable trades in Forex.