Forex is the most liquid market in the world, and operates round the clock. It is a market where currency pairs are bought and sold in order to benefit from favorable exchange rate movements. Forex signals refer to the various indicators used by forex traders in order to identify the appropriate time for buying and selling currencies.
A forex trader uses both fundamental and technical analysis in order to decide whether or not to trade. Fundamental analysis is based on economic factors that have a direct impact on the exchange rate. Technical analysis involves studying trends and patterns in order to decide on the prudence of a trade.
Forex signals help the trader reach a decision, on whether or not to execute a trade, by giving the trader an indication or signal about expected currency pair movements.
Types of Forex Signals
Technical analysis relies on accurate signals that are provided by chart indicators. In order to understand indicators, we need to understand the different types of charts. These charts can be classified as line charts, bar charts, and candlestick charts.
Indicators can be classified into two categories: Leading and Lagging. Leading and lagging indicators are economic factors that can be quantified.
Leading indicators provide a signal before a change occurs in the movement of currency pairs. In other words, they prepare a trader to spot a trend before a reversal is visible. This would help a smart trader benefit by buying low and selling high. Oscillators are leading indicators.
Simply stated, an oscillator is a pendulum which swings between two extremes; buy and sell. The only time the oscillator does not give an accurate signal, is when it is not positioned at one of the extremes. Parabolic Stop and Reversal, Relative Strength Index, and Stochastics are examples of oscillators.
Parabolic Stop and Reversal (SAR) helps a trader identify bullish and bearish trends. Relative Strength Index (RSI) and Stochastics, on the other hand, indicate oversold and overbought market conditions. When the market is oversold, one should buy. When the market is overbought, one should sell.
Parabolic SAR uses dots on the candlestick chart in order to indicate shifting trends. When the trend shifts from an uptrend to a downtrend, the dots shift from below the chart to above the chart.
Stochastics use red dotted lines to indicate overbought conditions, and blue dotted lines to indicate oversold conditions. If a chart has been indicating oversold conditions for a certain length of time, one can expect an increase in prices in the future.
Lagging indicators give an indication of the change in trend, after the change is clearly visible. This is helpful for people who are unable to spot the evident change.
In other words, a lagging indicator is a wake up call to move with the market and make hay while the sun shines. Lagging indicators never give wrong signals, since the change has already occurred before it is communicated to the trader. Momentum indicators are lagging indicators.
Depending on the kind of market, people have to decide between leading and lagging indicators since the signals are generally conflicting. This brings us to the importance of accurate forex signals.
How to Find Profitable Forex Signals
It's evident that a number of chart indicators need to be interpreted for ensuring profitable forex trades. Thankfully, there are forex signal systems, based on chart indicators and economic events, that indicate when a trader should buy and sell. These signals are available for free or at a reasonable cost.
A forex signal system, that provides accurate and profitable forex signals, can be manual or automated. Mechanical forex signal systems would require the trader to be present in order to buy and sell. A fully automated system, on the other hand, would not require the trader's presence in order to execute trades.
A good trader can use his technical and fundamental analysis skills and outperform any forex signal system.
However, a forex mechanical system is useful for a trader who is not comfortable with interpreting charts, while a fully automated system is useful for a trader who despite being told when to execute the trade, may not do so, because of hesitation and lack of confidence.