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How to Read and Understand Forex Trading Signals


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When you choose to engage in forex trading, you’ll quickly come to understand that it pays dividends to make use of any and every tool that is available. These tools should help push forward your trading strategy, improve your output, and effectively help generate more profit. Looking at what could very well take your forex trading efforts to the next level, forex trading signals happen to be something that no active trader can really afford to ignore.

Signals are electronically transferred titbits of information that you can receive via email, SMS, text, and—in some circumstances—even via social media platforms. This information often represents critical need-to-know data related to the market. In many ways, a signal is an on-the-fly update that you can incorporate into the forex trading decisions that you make.


Signal Formats

Forex signals are often issued via a dedicated forex signals trading service. Through these services, you’ll have a choice to make: You can choose to implement signals either automatically or manually. Automated signal trading really gained momentum during the late 2000s, and it was certainly popular among novice traders. The advantage of heading down the automatic signal-trading route is that it enforces unemotional trading along with increased execution trading speed. The downside is that you are putting faith in a service, system, or individual and pretty much taking the decision-making process out of the equation—or at least minimizing it.

Manual signal trading is something that those with more advanced-level forex trading experience tend to throw plenty of weight behind. The reason for this is that it puts the final decision in the hands of the trader, with the human intelligence factor still having a role to play. You do forgo speed—and possibly even efficiency—when you opt to manually trade forex signals, but for some, that’s a worthy sacrifice for increased control.

What are the advantages and disadvantages of relying on forex trading signals?

In a fast-paced, ever-evolving market such as forex, traders are looking for the best information that will help them anticipate price movements before they happen. Forex trading signals are used for exactly this purpose—although the results are never guaranteed, and your individual trading strategy will affect the profit you’re able to generate through these signals.

Here’s a look at some of the top advantages and disadvantages of using these signals to guide your trading activity.


Each trader can customize an approach to using signals that works best for them. 

Each trader is operating on their own desired timeline for opening and closing positions and may have different levels of comfort when it comes to risk/reward calculations. Furthermore, many traders end up choosing a particular trading strategy based on their past success and their level of comfort with certain signals. In this regard, forex trading signals can support whatever trading strategy you decide to use.

You can track trading signals in many different ways. 

From subscription-based services to automated alerts via email, text, or other communication channels, traders can use signals to watch for trading opportunities even when they aren’t actively following a specific forex chart.

Trading signals can deliver trading insights and recommendations based on diverse chart data. 

From historical data to trading volume and price momentum, forex traders can use signals to evaluate opportunities from several different perspectives. This can ultimately strengthen a trader’s confidence in their trading decisions.


Signals are an inexact science. 

While virtually all serious forex traders rely on trading signals to guide their decision-making, there’s a lot of disagreement over which signals—and which groups of signals—deliver the best returns. As a result, traders have to carve out an approach to using signals that works for them—with no guarantee that the strategy will pay off either in the short term or over a longer period of time.

False signals are a constant threat. 

Even when you’re using multiple signals to confirm trends and validate your approach, false signals are a constant risk with any indicator. Traders must always execute trades with a grain of salt, which is why no serious trader puts a significant amount of their trading funds into a single position.

An over-reliance on forex signals can give traders a case of “analysis paralysis.” 

When trying to conduct comprehensive research and eliminate risk from your trades, you can actually compromise your own decision-making and critical thinking abilities by attempting to account for too many variables.

Types of Signal Services

While many signal services will share some similar credentials, they aren’t one-size-fits-all by any means. From our own experience, we’ve found that a signal service will take one of the following four forms:

  1. Free or unpaid signals, which usually come about through a voluntary service.
  2.  Paid or purchased signals from a provider that delivers through either algorithmic or personal analysis.
  3.  Paid or purchased signals that will be derived from cumulative signal systems or sources.
  4. Signals (purchased or otherwise) that come from trading software that is located on a trader’s computer; this type of signal will be commonly listed as either an expert advisor or forex robot.


Four Common Signal Types

There’s a multitude of different forex signals out there, so it certainly pays to understand what each signal means. Here are four common signal types that any active or prospective forex trader should commit to memory:

  • “Action”This is a straightforward, call-to-action-style signal in most instances that often takes the form of a direct “buy” or “sell” statement. Typically, the best forex trading signals are ones that can provide a clear indication that price movement is about to change—which can serve as an opportunity to open or close a position.

    Popular sources of “action” signals include:

    • Moving Average 
    • Simple Moving Average (SMA)
    • Bollinger Bands
    • Relative Strength Index (RSI)
    • Moving Average Convergence/Divergence (MACD)
  • Stop Loss The stop-loss signal represents an exit point, which is designed to protect your investment. Detailed by a preset price, when the signal is automated, it will pull you out of a trade before losses begin to ramp up. While a stop-loss is recommended anytime you open a position, you can also choose to set trailing stop-losses as prices change, thus preserving some profit.

    Popular signals to reference when setting a stop-loss include:

    • RSI
    • Rate of Change
    • Stochastic Oscillators
  • Take ProfitActing as the opposite of a stop-loss signal, a take profit signal can be triggered once a profit level hits a set rate. Typically, a take profit signal is used to trigger an automatic sell-off from a position once that currency pair hits a certain level.

    In many cases, the signals used to set a stop-loss are also effective for placing a take profit order, although other signals are sometimes used to identify take profit opportunities. Signals you may want to use in this scenario include:

    • RSI
    • Stochastic Oscillators
    • Bollinger Bands
    • Fibonacci Retracement Levels
    • Moving Averages
  • Current Market PriceNot all signals represent a direct call to action; some are a notification of information. A current market price (CMP) focused signal will help you compare the price of the currency pair at the time of signal issue with the actual price at the time of submitting the order. Traders should use CMP signals to track potential buying opportunities that may develop as the price for a targeted currency pair moves toward lines of resistance, overbought conditions, or other criteria that you may use to trigger an action.

    CMP signals are most commonly used for the following indicators:

    • RSI
    • Fibonacci Retracement Levels
    • Moving Averages
    • MACD
    • Bollinger Bands


Reading a Forex Signal

Moving forward, before you take the jump and start using forex signals and forex signal trading services, it would be great to have a grasp on a realistic signal to get a further understanding of what it all means. While signals may take on different text and graphical forms, the content from most providers should generally be issued to you along the same lines. 

For example, you may see “Sell USD/CHF at CMP 0.9309 - SL 0.9334 - TP 0.9278.” Breaking down this signal, you’ll find that the call to action within the signal is to “sell,” and the pair in question is “USD/CHF.” The “CMP” is listed at 0.9309, with the dictated “stop-loss” being 0.9334 and a “take profit” level of 0.9278. 

As you can see, in spite of the abbreviation and number-heavy nature of any signal you receive, actually understanding what it means isn’t all that complicated.

Before You Use a Forex Signal Service

Using a forex trading signal service is easy. You simply sign up before copying the information into your trading account. This idea can often lure some into believing that reading, using, and understanding forex trading signals are a quick-fix approach to the market. This simply isn’t the case. While reading a simple signal can serve you with a bite-size instruction, it doesn’t negate any of the risks related to a trade. 

Before you opt to use a forex signal service you should know the following:

  • Understand the difference between forex signal providers.

    No two forex signal trading services are identical; you’ll find that they range massively in quality. Success rates for signal services vary from the high 60% range to something much lower, with there being plenty of “dud” systems around. Don’t read every forex trading signal service the same; instead grasp what exactly it is you’re signing up for before you commit.

    Understand your risk tolerance.

    Due to its level of volatility and leverage, forex trading presents risks. Thus, it’s possible to lose major amounts of capital in a flash. Popular trending pairs, such as the XAU/USD, can experience wild swings. So before you read into any forex signal you receive, you need to understand how comfortable you are with the related risk level.

    Understand the market conditions.

    Emotionless advice is generally what a forex signal will provide. However, this doesn’t provide an excuse for not understanding the market in front of you. Learn about the current market conditions and the limitations before you act on a forex signal.


When you choose to trade forex, what you need to do is grab every available edge. In the eyes of most, the biggest edge anyone can receive in this market comes in the form of forex signals trading. The reason for this is pretty much clear—especially if you’ve kept up with the information above—because they represent the missing link between staying on top of market conditions and lagging behind the most active traders around.



The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.