Forex signals: what are they & how they work

Forex signals are suggestions for opening trades on the currency markets. They can be a key tool for helping traders take advantage of profitable opportunities. They are available via many different communication forms, such as by phone, SMS, or e-mail, or via instant messaging services such as Telegram and WhatsApp.

What are forex signals & trade signals?

Simply put, a forex signal is a suggestion for a trader to enter a trade. Obviously, the main feature of forex signals is their convenience. In theory, you are able to draw on the know-how of a trusted trader, without having their experience or skill set for yourself. The signal provider will send a signal when they spot what they believe are ideal market conditions. Their analysis could be a result of several factors, such as world events and government announcements (“fundamentals”), and technical indicators and patterns on a chart. Signals can also be generated partly or wholly by trading software.

Forex signals explained

Forex signals generally consist of at least five key things:

The instrument. This is simply what it is that you should trade. This could be a currency pair, a commodity such as oil or Gold, an index – such as the Dow Jones – or even a cryptocurrency.

Buy or sell. The call to action, i.e., what you should actually do.

The price. While a signal might call you to enter the market immediately, this call usually doesn’t come without a price. This is so that it’s clear where you should enter the market. However, in some cases, the signal may be a pending order. Pending orders are only filled when the price reaches a certain point. You can easily identify pending orders because they contain, for example, BUY STOP or BUY LIMIT, or SELL STOP or SELL LIMIT.

A stop loss. This is a price at which your order closes automatically if the price moves too far against you. Stop losses are a key risk management tool for cutting your losses in accordance with your strategy. Generally speaking, you should never risk more than 1-2% of your capital on a trade.

Take profit. The take profit is a price in your favor at which your order closes automatically, securing your profits. Many forex signals come with multiple take profit points. However, there is no guarantee that all of them – or even one of them – will be met.

Other details

Signals in the form of pending orders may also include an expiry time or date. This is to ensure that they aren’t activated at a time when market conditions may not be favorable. Finally, the signal provider may also write the exact time within the signal. This will allow the recipient to verify if there has been any delay since the provider sent the signal, e.g. from internet lag or delays in cellular networks.

Free forex signals

While paid trading signals do exist, free forex signals are widely available on the internet. A common format is a free Telegram or WhatsApp group, in which the provider posts a limited amount of signals, versus a paid “VIP” group, in which there may be multiple daily forex signals. The provider may even include evidence of their analysis, such as chart indicators and projected price action.

What are the best forex signals?

Unfortunately, there is no “one size fits all” answer to this question. The best forex signals depend entirely on your strategy, for example, what it is that you trade (currency pairs, metals, indices), or the time period, such as intraday or swing trading, or scalping trades.

Here are a couple of considerations before picking a forex signal provider:

  • Your availability. In which time zone is the signal provider active, and how many signals do they post per day or even a week? If this is an issue, a signal copier could offer a solution, such as a Telegram to MT4 copier.
  • Testing. Test the signals on a demo account. Seriously, test, test, test them. If you can’t show them to be profitable on a demo account, why risk real money on them?
  • The risk-to-reward ratio. There are plenty of forex signal providers out there who give signals with a terrible risk-to-reward ratio. Just because a signal provider seems to have a high win rate does not guarantee that you will make a profit in the long run. For example, a signal to buy XAUUSD with an entry of 1850, a take profit of 1852, and a stop loss of 1834 is a risk-to-reward ratio of 0.125, which is extremely low. This RR means that you must win the next 8 trades just to break even. That’s potentially quite a tall order.

Other points when trading signals

It’s also worth considering exactly how the signal provider records their wins and losses. A common technique for obscuring losses is to mark multiple winning trades from a single signal as multiple successes, but only record the loss as one lone loss. For example, a signal has a 90 pip stop loss and take profit points at 20, 50, and 100 pips, each requiring an individual trade. The signal provider may report the 20, 50, and 100 pip wins as individual successes, but if the stop loss is hit, they will only report a single loss of 90 pips.

This is obviously misrepresentative. If a gain of 170 pips is reported, then so too should a loss of 270. Coupled with a poor risk-to-reward ratio, a seemingly winning strategy could actually be a failing one. Once again, don’t just trust that a strategy is successful. Instead, prove it to yourself on a demo account.