Whilst excellent risk and money management, coupled with a well defined forex strategy underpin the longer term success of most forex traders, it is our choice of forex trading signals which will ultimately define our entry and exit points for our forex trading system, and which encapsulate our reasoning for opening or closing a forex trade.
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Sadly forex trading has it’s fair share of get rich quick schemes, dodgy forex brokers, and questionable broker practices, but it is the forex signals ‘market’ that constantly seems to attract the worst kind of short term opportunism, as companies and individuals cash in on the desire of forex traders to find that magic bullet, that secret forex trading system, which not only tells them when to enter and exit every trade, but also one which makes consistent profits, day in day out. The reasons for this are many and varied, but let’s start by looking at what we mean by forex trading signals, and the various approaches which are available to us as forex traders.
If we start with a ‘definition’ of what we mean by an FX signal, and in simple terms this could be anything related to the market we are trading, but in general in the currency markets we have two options. The first is to use a trading signal based on fundamental analysis, and the second, is to use a signal based on technical analysis. The fundamental approach is to use the macroeconomic news based on such data as interest rates, GDP releases, inflation, current account imbalances, and a plethora of sentiment indicators which together provide forex traders with a view on the ‘intrinsic’ value of the currency.
This approach is similar in many ways to pension fund managers and equity managers who base their analysis of stocks and shares on such data as the Price/Earnings ratio which provide a view as to whether a share price is over valued or under valued against the market and similar companies. In much the same way, a fundamental forex trader will create his or her own economic model to forecast theoretical exchange rates and to trade deviations from these accordingly.
The second approach is of course the technical one, which relies on an ever increasing array of trading indicators coupled with chart analysis to provide us with our entry and exit signals. Now superficially, common sense might suggest that a fundamental approach to forex trading is the more logical, and therefore likely to be successful longer term. However extensive research over the years has shown that technical analysis provides better returns for forex traders.
The reasons for this are not clear, other than the fact that technical traders would argue that the price is everything – it encapsulates all the trading sentiment of the market in a simple chart which is freely available and watched by all forex market participants. Fundamental news and data on the other hand is often incorrect, incomplete, or statistically manipulated by governments and government agencies to meet their own short term political objectives, either to hide damaging data or to highlight positive news.
In addition, many central banks make no secret of the fact that they will intervene in the forex markets, should their currency weaken or strengthen and subsequently threaten to damage the county’s economic stability. Japan and Switzerland are leading exponents, and well know for supporting their own currency if required, making development of currency signals based on a fundamental approach very difficult.
As a result, most forex traders, whether professional or self taught, will tend to use a technical approach when developing a set of rules for their forex trading signals, which in turn has made it much easier for the scammers to capitalise. So what are are the two approaches available for you to develop your own forex signals?
Automated Forex Trading Signals
An automated FX trading signal is just that – it tells you what currency pair to trade and when, and in addition will also tell you when to both open, and close your position. Automated signals are often referred to as ‘black box’ trading system, and are generally based on a software application which analyses the historical currency chart data in order to deliver a simple trading signal.
The range of indicators and underlying complexity increases all the time, with many companies making extravagant claims as to their performance and success rates, but all have one thing in common, and it is simply this – they will all fail sooner or later. Some may work for a while, and then fail, others may fail immediately, but they will all fail ultimately. Increasingly, and worryingly, many reputable brokers are now offering forex trading signals as part of their trading platforms, promising easy trading decisions and emotionless trading as a result.
Whilst this is undoubtedly true, and your trading decisions will be stress free and lacking any emotion, they will not be profitable, and in the long run you will lose all your trading capital. The reason for this is simple – if anyone had developed a winning trading system, they would have dominated the world by now, and certainly wouldn’t be selling it to you for a few dollars a month. No such winning system exists, and never will, and my humble advice is to stop looking now, and start developing your own FX trading signals, which will ultimately prove to be profitable as long as you are consistent and patient in your forex trading strategy.
Finally, let me just say I have never used an automated signal and never intend to either – I wouldn’t waste my money. I recently undertook some research myself just to prove the point, and all five software applications I tested, failed within the first few weeks, losing all my trading capital in each case. I hasten to add that these were all tested in various forex demo accounts, and all followed the same pattern – a few weeks of success, followed by a dramatic failure. If you use such systems, this will happen to you as well ( perhaps more slowly), but the end result will always be the same.
Discretionary Forex Trading Signals
Discretionary forex trading signals, simply means signals that you devise and follow based on your own analysis. You develop these based on your own expertise, analysis, and an understanding of what makes the forex market tick, but the underlying principle is very simple – they are yours, and yours alone. In developing your trading strategy, and incorporating your trading signals, you are responsible for your own success or failure.
There is no black box to blame, and more importantly for each and every trade you make, you understand the underlying philosophy and rationale behind the trade. The FX market, like many others, is driven by supply and demand, but with no volume indicators to signal major buying or selling, we have to develop our own trading signals based on price, and indeed as I have indicated above, many technical traders would suggest that price is all that matters.
The price encapsulates all the flows of money back and forth, and the underlying sentiment of the market against the broader backdrop of the macroeconomic and fundamental news. Developing our knowledge and experience takes years, which partly explains the constant demand for automated trading systems, as traders look for a quick route to success. For my own part, it has taken me 15 years to develop my own signals which I will share with you over the next few months on this site, and I hope you find these useful in due course.
They are all simple, and based on a deep understanding of how forex markets react at key price levels, coupled with an extensive knowledge of Japanese candlesticks which again I have studied for many years. Analysing price action in the forex markets is not easy, and cannot be taught easily, but if you are prepared to study, practice and learn, then chart analysis will become second nature to you, as it is to me, as you begin to read the markets and the consequent flows of money as a result.
All of my currency forecasts on the home page are based on my own analysis and trading signals, so if I do suggest a turning point trading opportunity in my regular forex market forecasts, then you can be assured that you are following my own trading signals, and not a black box system!