What Are Forex Signals?
Forex signals are a specific set of buy and sell instructions for taking a trade.
To understand how to use, read and understand Forex signals, a full signal should contain three elements:
1. Entry Rules
This should contain the Forex pair, the entry price, the type of entry order, and any other conditions. For example, “Buy Limit order GBP/USD at 1.2650. Cancel the order if the entry is not triggered by Friday, 5 p.m. ET.”
2. Stop Loss Placement
This states the exit level if the price goes against the trade. For example, “Stop loss at 1.2600.” Every successful trader I know uses stop losses because they are essential for controlling risk.
3. Take Profit Rules
This states what level to set your take profit. For example, “Take 50% of profits at 1.2700 and move stop-loss to break even. Take the remainder of profits at 1.2750.”
Money management rules: Some signal providers provide position sizing rules, such as "Risk 2% of the account on this trade" or "Risk half the normal position size on this signal.”
Types of Forex Signals
Manual versus Automated Signals
A manual signal is generated by a human. This is often the result of discretionary (i.e., non-mechanical) trading. A good example of discretionary trading is a trader making trading decisions by looking for and interpreting chart patterns without indicators.
An automated signal is generated by an algorithm according to fixed rules. For example, a signal provider can code the trading rules into a MetaTrader Expert Advisor (EA) to create automated signals.
Some signals are a blend of manual and automated signals. For example, a computerised system may recommend a trade. Still, the signal provider might reject sending the signal because the higher timeframe shows a support or resistance level nearby that could prevent the trade from reaching its profit target. Signal services such as MQL5 assign their signal providers a percentage score of how much of their trading is automated vs. manual.
Entry-only Signals
Some signal providers publish only entry signals.
It isn't easy to know whether entry-only signals are profitable. Profitability in trading depends on exits as much as entries. If the signal provider gives only entry rules, the subscriber must decide the stop-loss and take profit levels. Different traders can have very different results depending on how they exit trades.
I don’t consider entry-only signals to be full Forex signals. There’s nothing wrong with subscribing to entry-only signals, particularly if I understand the subscriber’s method and can assess where to place the stop-loss and profit targets. Just remember, they are not full signals.
Copy Trading vs. Manual Entry
Copy Trading is when the signal provider automatically executes the trades in the subscribers’ accounts through an electronic connection.
The main advantage of copy trading is that the subscriber does not have to be available when the signal provider releases the trades. I would like more time to trade through the day or to know if the signals have been released in a different time zone. I live in Toronto in the Eastern Time (ET) zone, and if I want to trade the London Open, which starts at 3 a.m. ET, my best option is through copy trading.
The main disadvantage of copy trading is that I have no choice about whether to take a signal or not. I may have a different market view than the signal provider or want to avoid trades with reward-to-risk ratios less than 1:1, but the copy trading subscription usually cannot filter out those trades.
Set & Forget Signals
Some signal providers publish the entire signal immediately (entry, stop loss, and take profit) and only adjust those parameters once the trade is complete. This is known as “set and forget.”
The main advantage of set-and-forget signals is that they don't require monitoring once I place the trade, making the process much easier to manage. On the other hand, if the signal provider continually adjusts the trade parameters, e.g., changes the take profit level when I’m in the trade, I must be available to make that change on my platform.
The main advantage of set-and-forget signals is that the market is a dynamic environment with changing conditions. Traders often must adjust stop losses or targets or prematurely exit a trade. Giving the signal provider leeway to make changes as the trade unfolds helps maintain profitability.
Identifying the Best Free Forex Trading Signals
There’s no one way to identify the best free Forex signals, but here are two tips:
- Many of the best free signals are from brokers working internally with signal providers. Brokers benefit because it gives them more customers to use their services.
- Their track records are available on live accounts, i.e., they’re not trading a demo account, and the broker can verify the live account statements.
Tips on Forex Signals: Who Can You Trust?
Here’s my guide on finding and using signal providers.
- Start with the track record. The longer the track record, the better. I recommend a record of at least 100-200 trades for short-term traders and 50+ trades for swing traders.
- Be comfortable with their historic drawdowns. Look at the size of previous drawdowns and their length, i.e., how long it takes to recover from a losing streak.
- Test the signals on a demo account first. No matter how excited I feel about a signal provider, I always try it on a demo account first. This tells me whether the historical track record is realistic in real time and whether the signal provider gives enough time to place orders.
- Use a signal provider that explains their strategy. Unfortunately, many signal providers use automated scripts that they don’t understand. That increases the likelihood of it not working in the future as they don’t know how to adjust to market conditions.
- Look for reviews. Spending time researching reviews has helped me avoid many poor Forex services.
- Can I execute the signals in my time zone (if it’s not copy trading)? The signals need to be given at times convenient for you to execute.
- Look for signal providers with high reward-to-risk ratios. Aim to use a signal provider with a minimum 1:1 reward-to-risk ratio on their trades.
Are Forex Signals Worth It?
If you are going to pay for a Forex signal service, you should ask yourself whether it is worth it for what you will get. It is easy to forget this consideration if you expect to get effective market tips. Still, you must make sure that what you pay for the service is less than the average amount of money you will make each month by following the signals. If you want the trading education of seeing good signals, you might also factor that into your calculation.
Bottom Line
Forex signal services come in all shapes and sizes, from short-term trading to swing trading, automated/algorithmic vs. manual signals, and copy trading for the automatic execution of signals. Although signal services don’t teach trading, anyone can profit from them, whether you are a beginner or an experienced trader. Like any Forex service, test on a demo account first and read reviews.
