Trading signals are the literal signals that the service provider sends you. These signals are a soft reminder about the status of the market.
Unlike trading robots, trading signal service providers allow traders to execute the trade themselves. This gives traders the right to adjust their entry or exit points based on their own market analysis and strategy.
However, false signals are common in the financial market; unfortunately, beginner traders fall victim to them. This results in significant losses, which could lead to investment ruin.
Lesson Highlights
- Forex trading signals are alerts provided to clients about the optimal entry or exit points. However, the main criticism of trading signals is their inability to adapt to the ever-changing forex market, which puts clients at significant risk.
- These alerts are programmed to be triggered based on pre-determined criteria, such as market patterns, increased trading volumes, and even sentiment extremes.
What Is a Trading Signal?
Trading signals are alerts or indicators that suggest profitable trading opportunities in the market. It guides you in buying or selling an asset based on the service provider's own set of sophisticated rules.
It can be a valuable tool, especially for new traders not yet equipped with sound market analysis techniques. It is marketed to remove you from the hassle of the learning curve every traditional trader experience and suffers from.
A good and potentially profitable trading signal must have some common market input to ensure accuracy. This includes;
- Technical Data and Pattern
- Moving Average
- Increased Trading Volume
- Interest Rates
- Volatility
- Cycles
- Sentiment extreme
- Valuation
How does trading signal work?
Choosing the most optimal and profitable entry and exit point is vital when you trade. With a reliable trading signal, you don't have to worry about constantly monitoring the market. Simply subscribe to one, wait for the signal, and act upon it.
When you subscribe to a trading signal, you can expect the signal to arrive via SMS, email, phone call, or even on your social media account.
But how does the provider come up with the signal?
Well, there's no definite answer to that. Each signal provider has a different approach to programming a signal.
It can be engineered to a set of technical inputs or on more comprehensive algorithms based on the market actions (economic indicators, volume surge, sentiment extreme)
However, you should know that most signal providers reserve the right not to disclose their approach and rationale behind each signal. This makes trading with signals slightly risky because you don't know its basis and accuracy.
Look at Joshua's trading situation to see how the trading signal works and how he uses it.
Joshua is a new forex trader, yet he knows the importance of market analysis. However, he wants to enter the market quickly, so he subscribes to a signal provider.
One day, Joshua received an SMS notification from his signal provider. Basically, it notifies him about the long (buy) opportunities for EUR/USD. The signal is triggered by a bullish crossover of moving averages and bullish divergence on the MACD indicator.
Being the new trader that he is, Joshua entered the market as soon as the price reached the level provided by the signal.
Trading signals and the dynamic market
This goes without saying: the financial market is dynamic. It changes from time to time, depending on different factors.
Here comes the criticism of trading signals; their inability to adapt to the ever-changing market. What works well in one market environment may not be effective in another.
You can't expect trading signals to perform well in all market conditions, especially during periods of high volatility or unexpected news events.
Also, it's hard to find a signal that fits your entire trading system. Trading signals are mostly triggered based on generic criteria; they may not meet your risk tolerance and trading needs.
Let's return to Joshua's trading situation and see how the signal performs in the dynamic market.
Joshua entered a long EUR/USD as suggested by the signal he received. However, unexpected market news from the US has caused the EUR/USD to decrease in value.
The sudden downturn caught Joshua off guard, and despite his initial confidence in the signal, it failed to anticipate or react to the market's swift change. As a result, Joshua incurred substantial investment losses.
Now you know trading signals are far different and riskier than advertised. In the next lesson, you'll be familiar with the common scams and how to avoid them in the financial market.
