One major objective of a Forex trader is to understand the trend that follows and how to apply the same for future price predictions. Newbies tend to copy trading signals and put them to their use. This often results in a disaster. Currency prices fluctuate without prior notice and it is the trend of their rise/fall which determines your trading strategies. If you are new to the trade and you may stumble upon ‘what is a forex trading signal?’ this article will help you out.
What is a Forex trading signal?
Consider a situation in which you are trading with a particular currency pair. For the sake of assumption, say that you have no prior idea about the pair and how it reacts. Your aim is to reap the benefits arising out of a change in relative prices of the two. Chances are high that you miss the potentially beneficial positions and end up losing your investment.
A Trading signal comes right there and provides an idea of the behavior of currencies you are trading with. Say for example that trend is low since prices are falling. This is an indicator that it will rise in future because of automatic correction of internal factors which lead to fluctuations. On being asked, ‘what is a forex trading signal’ you therefore come to the conclusion that it is an indicator of the future behavior of currency prices based on past behavior.
Role of a perfect Forex trading signal:
Different types of signals work on different principles. This depends on your currency pair your choice of broker and ex ante trading strategy. Traders facing ‘what is a forex trading signal’ and similar questions generally confuse their way into choosing the best.
Trading signals base its research on past data. This may involve using moving averages with one new value for each day. Calculating the standard deviation of the price from its mean, trading signals denote how much has the price risen or fallen. However, there are certain trading indicators which deal with future predictions as well.
Economists are of the view that economic variables can play their role in affecting currency prices. While they do not have a direct impact on the prices, they can influence the trading aspects on a wider scale. Say if imports rise more than exports, home currency gets siphoned and its value falls.
Economic News can also act as important trading signals and provide useful knowledge on what is forex trading signals. If the Central bank of a country manipulates the monetary policy, then it’s a signal that traders associated with its currency should make allowance for the change.
Choosing the best trading signal:
Simplicity is often the best policy and therefore veterans recommend on choosing a simple trading signal. If traders face questions like ‘what is a forex trading signal?’ it is one that allows a clear representation of the past period data. Moving average is one of the simplest ways to do it. Ensuring loss minimization is essential and therefore the best trading signal should provide a weekly/monthly/annual data on price behavior.
Summing up, it’s not always easy to understand price behavior. Forex, unlike gambling requires experience and a sound knowledge of the price affecting parameters. If your fellow trader asks ‘what is a forex trading signal’ your answer should begin with trend analysis followed by indicator usage.