What Are Forex Signals and How Can You Use Them to Make Money?

What Are Forex Signals and How Can You Use Them to Make Money

Got dollar, yen and yuan on your mind? Learn how to use forex signals and get them in your wallet!

“Forex”, a shorter name for foreign exchange, refers to the exchange of one country’s fiat currency for another. Foreign exchange swaps hand on the over-the-counter (OTC) market directly between traders as opposed to stocks that are traded on the stock exchanges. By trading two currencies, traders (whether individuals or hedge funds) can earn the difference between their values as well as profit from the differences in interest rate across countries. 

The global forex market is worth US$2.409 quadrillion as of 2022 and is the largest market in terms of liquidity, trading volume and value. It is open five days a week, 24 hours a day. Most forex traders are financial institutions, like banks and fund managers, trading on behalf of their clients. However, in recent years, more retail traders have been entering the market. These institutions hedge their bets by speculating on which direction the foreign exchange market will move. If you are wondering how can you enter this market, here is a rundown of forex signals and how to use them to become a successful forex trader.

What are forex signals?

The essence of forex trading is to find the right asset to invest in at the right time. To facilitate this process, traders use forex signals. Forex signals are trading recommendations that tell traders to buy a specific asset at a specific price and a predetermined period of time in the future. Forex signals can help traders quickly learn the ins and outs of the foreign exchange market by forcing them to think about the logic behind the recommendations.

These signals are generated in two main ways—automated and manual. Automated signals are generated by trading software based on historical data on how the values of two currencies have changed in relation to each other. These signals are usually used for short-term trade decisions. On the other hand, manual signals are those that are created by a seasoned forex trader. What separates the two is that manual signals also take current news events into consideration when giving out trade recommendations. 

Besides the way they are generated, there are other ways of classifying forex signals. These include paid and unpaid signals as well as entry and exit signals. Paid signals and unpaid signals are pretty self-explanatory; they are either free to access or come with fees. Entry and exit signals are signals that tell you when to open and close a trade position in the market respectively. 

How to read and use forex signals 

Now that we know what Forex signals are, the next step is to learn how to use them effectively. Forex signal service providers send updates to you by email or message. This ensures that you don’t end up missing good buying and selling opportunities. An example of forex signal that you receive might look like this: “Sell USD/EUR at CMP 0.9421 – SL 0.9432 – TP 0.9389”. This can be broken down into the following: 

  • Sell: This is the action that the signal is suggesting you do. The only other action you would be asked to take is “buy”.
  • USD/EUR: This is the currency pair being traded, and it is presented in the form of “base currency/quote currency”. All currencies are assigned three-letter codes on the foreign exchange market. In this particular case, USD stands for the US dollar and EUR stands for the euro. This sell signal is now telling you to sell 1 unit of USD to receive EUR0.94.
  • CMP: It refers to the “current market price” at which the currency pair is being traded. 
  • SL: A short form of “stop loss”. SL refers to the price limit where, once reached, an open position will be closed to prevent more losses. 
  • TP: A short form of “take profit”. TP refers to a price level where, once reached, the position will be closed to lock in profits.

Once you know what these abbreviations mean, it becomes much easier to follow the instructions given by the signal provider. If you are a newbie in the forex trade, it is better to stick to the signals given by the provider you sign up for. Certain services will allow you to copy trade wherein your investments will automatically follow the signals. Over time, as you gain more experience in forex trading, you can take these signals as guides and use your own knowledge to make decisions.  

Finally, when choosing your signal provider, it is important to remember that not every forex signal website on the internet will give you reliable information. Make sure you check the signal provider’s website for past signal information to ensure that they have been consistently making the right recommendations. A reliable provider would also have a list of guidelines that you should follow when using the forex signals. It will also provide customer support to help you in case you run into any issues when navigating the information provided. 

Remember that all signals are flawed and wouldn’t be accurate all the time. Nearly 71% of all retail forex traders lose their money, so carefully evaluate risks and conduct thorough research before you enter the market. 

This article is meant for informational purposes only, please make investment decisions based on your own discretion.

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Header image courtesy of Pixabay

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