Beginner’s Guide to Forex Trading Signals
Dec 20 2024
Do you need help finding trading ideas? Forex trading signals tell you exactly when to buy and sell currencies. These alerts are generated by professional analysts or algorithms.
Forex signals require zero technical knowledge to follow and are a great resource to level up your trading skills. Keep reading to learn how to simplify your trading decisions and use forex signals to their full potential!
How Do Forex Trading Signals Work?
A forex trading signal provides all the information you need to make a successful trade, including the following:
- Currency Pair - The forex signal will specifically tell you which currency pair to trade, for example, USD/JPY.
- Entry Price - The forex trading signal reveals the exact price you should purchase the currency at, say, buy USD/JPY at 154.
- Exit Point - The exit point is the price at which you close your trade, for example, USD/JPY 165.
- Stop Loss - This is the price point at which the forex signal becomes invalid and will limit potential losses. For example, let’s say you buy $1,000 worth of USD/CHF at $0.89. You might set the stop loss at $0.8455; if the price reaches this level, your trade will be automatically closed, and the maximum you will lose is $50.
Forex signals rely on speed and are delivered instantly via instant messenger, email, text, and mobile apps. The signal will also often contain instructions on what broker to use and how to place the trade within seconds.
Types of Forex Trading Signals
There are two main types of forex trading signals: manual and automated. Manual forex signals are created by professional traders who analyze the markets and then reveal their ideas and positions. In contrast, automated signals are generated by software or algorithms.
Both types of signals can be profitable, however, their effectiveness comes down to the accuracy of the individual trader or software. Manual forex signals are better suited for beginners, as traders will typically share their thought processes and explain why they are making trades. This can really fast-track your improvement and teach you how to think about the markets like a pro.
The downside of manual signals is you have to wait for the trader to generate ideas. If the trader takes a break for a few months, you are on your own. On the flip side, the trading software will constantly pump out automatic signals. However, there is no explanation as to why the software is recommending the trades and getting access to profitable software is not easy.
Advantages and Disadvantages of Using Forex Signals
Forex signals are a great source of trading ideas. They are easy to follow and allow you to mimic the positions of professional traders even if you have zero knowledge of the financial markets. Signals are also a fantastic learning tool. They can teach you how to identify setups, where to place stops, and how to manage risk.
The major disadvantage of forex signals is they are only as accurate as the trader providing them, and most traders can’t beat the market. If you blindly follow the recommendations of a losing trader, you will also end up in the red.
Even the best traders may only be correct 60% to 70% of the time. So, it may take a large number of trades before you can determine if the signals are accurate. Market conditions change rapidly, so you also need to be able to discern when a forex signal is no longer relevant.
Another disadvantage is you’ll have to pay for the best forex signals. There are free signals available, but they’re usually free for a reason! Premium signals start from $10 per month with most costing between $30 and $50 monthly. Some companies use a profit share model where they take a percentage of winning trades; this is known as copy trading.
How to Choose a Forex Signal Provider
Not all forex signal providers are equal. To ensure you get the best signals, look for trustworthy providers who excel based on these factors:
- Elite Performance - The best forex signal providers have a 70%+ win rate over thousands of trades and are very transparent in revealing their track record. Avoid providers who refuse to show their past performance or boast about 90%+ accuracy.
- Regulated - We recommend sticking to licensed forex signal providers regulated by the Commodity Futures and Trading Commission (CFTC) and Financial Conduct Authority (FCA). Licensed providers are prohibited from lying about the accuracy of their signals or making claims about guaranteed profitability.
- Uses a Variety of Strategies - Strategies come and go in forex. It’s important the provider can offer winning signals in different market conditions and for a variety of currency pairs. Some of the most effective forex strategies are range, breakout, and overbought/oversold trading.
- A Large Number of Signals - The top forex providers offer between 20 and 100 signals per month. With so many signals, you can pick and choose which ones are worth following and also smooth your risk profile instead of relying on a few trades per month.
- Provides Market Commentary - Trading signals alone won’t improve your skills. Look for platforms that also describe market conditions and provide the rationale behind their signals. Use this analysis to level up your trading knowledge.
- Strong Reputation - Read reviews, reach out to users, and ask them about their experience using the provider. Poor-performing platforms quickly rack up a lot of negative reviews, and disgruntled traders are quick to let you know who to avoid.
- Affordable - Forex trading signals don’t have to be expensive and start from $10 per month. Compare a number of different providers and check if the platform offers a free trial or money-back guarantee so you can test the signals risk-free.
Before you fully trust forex signals, analyze the provider’s past performance, make sure they’re regulated, compare their price to other companies, and ensure they’re offering consistent monthly signals.
Tips for Using Forex Signals Safely and Effectively
Don’t blindly follow forex signals. You should first develop a view of the market and then use the signals for trading ideas and confirmation. For example, let’s say you look at the USD/CHF chart and determine that it looks oversold, then receive multiple signals telling you to buy the pair. In this scenario, you’ve likely found a winning trade.
It's important to choose a legitimate forex signal provider. To test their signals, start with paper trading. Brokers offer demo accounts where you can trade hundreds of currency pairs with real live prices. After you’ve made a few thousand trades and found a provider that offers accurate forex signals, you can switch to real money mode. Paper trading is also a great practice for following signals and learning how to place sell and buy orders without risking your cash.
Don't become over-reliant on forex signals. You need to analyze your past performance to improve continuously. We recommend keeping a journal of all of the forex signals you've followed. Regularly read through the journal and dive into what went wrong/right in trades and why. You'll quickly identify which types of forex signals you've had the most success with, for example, scalping AUD/USD.
When you are using forex trading signals, always practice risk management. It doesn’t matter if you’re the second coming of George Soros and follow signals with 80%+ success rates; you’ll churn through your account if you place oversized positions. As a rule, don’t risk more than 2% of your capital on a single trade, so if you have a $10,000 bankroll, your max trade should be $200.
Don't use a mental stop loss when you place a trade using a forex signal. Too many traders tell themselves that they'll follow the stop loss and manually close the position, only to watch the currency pair go lower and lower, turning what should have been a small loss into a capital-destroying trade. Instead, physically place a limit sell order at the level stated in the forex signal. This order will automatically liquidate your position if the market moves against you.
Learn More with STIC Cashback’s Forex Guides
Before jumping straight into following forex signals, we recommend you level up your trading knowledge. Signals are much more effective when you use them with your research. Here are some guides to get you started:After you’ve devoured these resources and are ready to use forex signals, head over to STIC Cashback’s promotions page to kickstart your trading journey!
Signals Forex FAQ
What are forex signals?
Forex signals are alerts that advise you to buy/sell currency pairs at certain times. Forex signals require no trading knowledge and allow you to place trades easily by giving you ideal entry, exit, and stop-loss points.