How To Choose The Right Trading Signals When Trading Forex?

Signals are pieces of information transmitted to the trader via email, SMS or instant messaging. What this information represents is often critical to identifying trading opportunities on one or more currency pairs.

In other words, a signal is information that you can rely on to make your trades. However, how can you recognize, among the profusion of available signals, the signals with real reliability and with the best probability of profits? This is what we explain to you in this article.

Forex Trading Signals: How to Read Them?

Before we get into the nitty-gritty of forex signals and the different services that provide these signals, it is important to understand what these signals mean.

💡 Although the signals may vary from one service to another, the logic always remains the same!

For example, you will often come across information like “Sell EUR/USD at CMP 1.2130 – SL 1.2140 – TP 1.2110”.

What does this mean and how to use these instructions on your trading account?

Our example is therefore a sell signal: if you use a trading platform like MetaTrader, this is the information that you will simply report on the order ticket!

As you can see, despite the apparent complexity of the signal, the instructions contained in it are ultimately easy to understand: sell / take a short position on the EUR/USD pair, with an entry point at 1.2130 and exit points at 1.2110 and 1.2140 – but with a position size in lots that you still have to define.

Automatic or Manual Forex Trading Signals?

Trading signals are often generally provided by services, which traders can subscribe to with a few clicks, for free or not.

Using these services, you will usually have the choice of copying the signals automatically or manually to your trading account.

Automatic signals are particularly popular with novice traders: their main advantage is to reduce the emotional part of trading, while significantly increasing the execution speed!

Conversely, their main disadvantage is that you have to put your trust in a service, a trading robot or an experienced trader who does all the technical analysis and decision-making for you – or at least a large part of it.

Manual trading signals are more recommended by experienced traders. The reason is simple: the final decision to take a position always rests with the trader.

So you have a trade-off of sacrificing some execution speed (and probably efficiency) to maintain greater control, most often making sure you follow your trading plan and money management strategy.

 Different signals and different services

But concretely, where can you find relevant buy and sell signals to guide your positions on the forex market?

Overall, 3 types of services are particularly used to find signals:

• On the trading platform: on platforms such as MetaTrader, for example, where a whole list of signals is available independently of your forex broker, most often from forex robots or an Expert Advisor (EA), i.e. computer programs that “scan” the different currencies/currency pairs in search of entry and exit points
• On specialized sites: on sites such as ForexSignals.com, for example, where the analysis is carried out by forex market specialists also aided by algorithmic programs
• On communities and information sharing sites: on Facebook groups labeled “forex trading” or social trading forums where traders discuss, exchange and above all voluntarily share their trading ideas and their comments on this or that currency pair.

And what about forex brokers? Unfortunately, European and AMF regulations on forex brokers prohibit them from providing you with trading signals, which are similar to investment advice on the currency market.

However, Forex brokers such as eToro and FXCM will often offer you to subscribe to a third-party service (among the first 2 mentioned above), most of the time free of charge. So, whether it is a demo account or a real account, the beginner can use these forex and CFD “trading ideas” to become a better trader and make money!

Which trading signals to choose?

Here are some key indicators to consider when selecting your trading signals.

In other words: beyond pure performance indicators, there are other criteria that will allow you to evaluate the real relevance of a signal in relation to your trading plan or technique.

Depending on the provider, not all of these indicators will necessarily be available. But with a handful of them, you will already have something to think about before using the signal for your demo account (to test it first) or real account.

Let’s look at 2 particularly revealing criteria for a given trading signal:

• The maximum drop, also called “drawdown” : ideal for measuring the quality of trading and especially risk management on a trading strategy. Indeed, even if a trade turned out to be a winner, it may have recorded a significant drawdown, indicating that the position was kept at a loss before finally resulting in a gain…
• Deviation : Particularly relevant for signals that are automatically reproduced on your account, this indicator shows you the gap between the execution price of the original signal and the execution price on a given broker. Enough to remain cautious if the gap displayed (measured in pips) for your broker is very large…

All these checks make sense, yet many novice traders do not take their investigations this far and thus expose themselves to major disappointments.

Conclusion: Before Using a Trading Signals Service

Now that you are familiar with the different signals and how to select them, you just need to adapt them to your Forex trading plan and your money management.

Because in fact, hand signals rarely, if ever, tell you the following: What lot size? What leverage? What margin is required?

Note: Trading signals are a valuable aid in making a quick decision regarding a currency pair in times of high volatility, and to skip the reading of technical indicators, the analysis of liquidity on the foreign exchange market, the analysis of the economic calendar, the analysis of stock indices linked to a currency such as the dollar.

But as effective as it is, the signal does not in any way erase the risks associated with a trade.

Before using a signal to trade forex, do not neglect the following aspects:

• Understanding the differences between different signal providers : Just like a forex broker you are considering opening an account with, no two signal providers are the same, even if they both talk about EUR/GBP, EUR/CHF or USD/JPY for example. As mentioned, instead of limiting yourself to pure performance indicators, carefully evaluate what is behind this performance!
• Understand your risk appetite : especially in relation to the currency indicated in a sell signal. You may be tempted to break out of your comfort zone and trade the XAU/USD pair, even though it is “moving” a lot and could cost you a lot of money!
• Understanding market conditions : the forex market remains a financial market, and a currency pair is like a stock market asset – complex to understand for any investor. Before speculating on it, there is therefore no excuse for skipping a better understanding of the factors that influence prices, particularly in terms of fundamental analysis.