It’s very unlikely to come across a forex trader who trades currency pairs without some sort of technical assist or indicator. Even if the trader relies mainly on fundamental analysis, there will still be signals informing the trader of potential buy or sell opportunities.
But how does signal providers work? Signal providers use mainly technical information and past market movement to indicate the direction that the market is moving in. They follow the trend and with technical indicators they can predict if the price will increase or drop.
An accurate signal provider can even predict possible price swings to come. If the technical data shows a potential price swing then the information is compared with past forex market data to determine precise market direction.
How are Signals Generated?
A minority of signal providers use fundamental analysis as well when providing signals. Fundamental analysis includes the current economic state, the unemployment rate, and other factors such as interest rates. Signal providers mainly work through supplying the client with a trading assist robot which shows the client indicators as to when to enter a trade and when to close a trade, and also in what direction the price is moving in. Since the majority of signal providers use robots, the data their fed are mostly technical.
When determining what external forex signal provider to use it’s necessary to know that free signal providers often just provide an indicator robot that can now and then predicts wrong price movement. This is because bots work solely on algorithms.
Where paid signal providers make use of human analysts that take into account factors outside of the market such as political events taking place that can influence the currency. It basically works as follow, the more information the signal provider uses the more accurate the signals will be, and in a way more expensive as well.
Tips Before you Trade
It’s recommended that a trader first tests his or her trade indicators and signals on demo accounts to make sure they provide corresponding information with their current live accounts to know if the indicator will win or lose trades. This is because different signals can sometimes clash. Example, your trend signal provider can indicate price increase and show buy potential where another signal provider can suggest a sell.
A solution to this problem is that when you make use of external signal providers, test them one at a time on a demo account. Since the market movement on a demo account is mostly 100 percent accurate as to the movement of a real-time live account make sure that the signals you’re provided with are correct before using it to a real money account.
External forex signal providers are very beneficial for new traders as they have a better fundamental and technical understanding of certain aspects that new traders forget to add to their trade strategy. These signal providers are also a great aid for traders who can’t invest a lot of their time on monitoring the financial news or current price trend.
Use Signals Sparingly
But as full time or professional traders would agree, forex signals should mainly be used as informative and not be used as a trading method by traders. So it’s important that you remember that trading is still your own responsibility, and it would be foolish to make buy or sell decisions based only on forex signals.
Rather use forex signals be it human analysts or indicator robots, alongside your own gathered market information to build the ideal and accurate strategy that works best according to the time you’re willing to spend trading and the size of your account balance. Trading only on signals will quickly run your account into the ground. The indicator can show you to keep your trade open while your account is already deep in the red, resulting in you not being able to keep the trade open and missing out on the profitable price swing.