There are several ways for both active and non-active traders to profit from forex. Within the industry, there are thriving communities of PAMM account investing and copy trading. Another model with similar goals of leveraging off trading ideas from others is signals.
One isn’t hard-pressed to see how immense this subset of forex trading is. As with any endeavor, many people may be wondering whether signals have any merit or not.
What are forex signals?
Signals are actionable trading recommendations given by another trader or organization to buy or sell a specific market with predefined entry, stop loss and take profit levels. They may generate signals either through discretionary or automated methods.
In many cases, the person taking the signals is usually inexperienced or may have no interest at all in learning trading but would like to generate an income from it. Therefore, they will entrust the services of a signal provider to achieve this goal.
Signals allow investors, without doing much work, the ability to profit from the markets leveraging the experience of someone or something with some proven profit consistency.
Active traders can also gain from this service by diversifying and spreading their risk rather than concentrating solely on their trading system. With digital technology advancement, investors will usually receive signals via instant messaging services like WhatsApp or Telegram, email, SMS, etc.
Signals are either a monthly subscription or maybe free. However, in this latter case, the signal provider would probably have a proviso that the receiver deposits a minimum deposit through their affiliated broker.
Knowing who and what is behind the forex signals is key
Whether a computer or a person is behind generating the signals, this is one major aspect many signal receivers should consider. If one isn’t trading using their own discretionary methods, this becomes imperative.
It is an area many do not place enough emphasis on, and this goes for other forex investments like copy trading and PAMM accounts. Knowing the methodology behind the signals and how they are generated in the first place is what will provide realistic expectations.
For example, someone receiving signals from a day trader will expect a higher occurrence of them. However, signals coming from a swing trader will be far fewer since the trading frequency here is much lower. Some traders are naturally high-risk traders, while others are more conservative.
The investor needs to be comfortable and understand the risk to reward parameters and ensure they align with their own personality. Receiving signals doesn’t mean the investor should not have some form of education.
Understanding the track record of a signal provider
Another critical consideration is looking at the track record, and this is where a vast majority of signal providers fall short.
One common trick investors should be aware of is purported successful results generated within a short period, like a month. It’s always better to look for a verified track record over at least one year through an analytics platform like Myfxbook or FX Blue.
Pros and cons of forex signals
Despite there being a mostly negative perception towards signals, every case is unique depending on several variables. Therefore, there are advantages and disadvantages.
- Ability to profit with minimal effort. Perhaps the most attractive aspect of signals is allowing those receiving them to profit from the markets with no analytical work on their part.
- Diversification of markets and strategies for active traders. It is not only new or inexperienced individuals using signals. Intermediate and professional traders may also consider this option to spread out their risk with different markets and strategies.
- Over-reliance on signals. Perhaps the biggest drawback of signals is the investor’s tendency to become over-reliant and shifting the responsibility towards the signal provider.
This is especially prevalent among those who have no experience or even knowledge of the mechanics of trading any market, let alone forex.
One common thing that usually occurs is a drawdown. This goes back to knowing what is behind the signals and how they’ve realistically performed in different market conditions.
If the investor doesn’t understand that every trading system has a drawdown, they will likely lose confidence in those signals entirely. There is a fundamental educational gap with receiving signals.
- Risk is not removed entirely. Receiving signals doesn’t significantly remove the risk associated with trading forex. Although the recommendations will state the stop loss level, the investor receiving the signals can still make a position sizing mistake that could lead to substantial losses.
- Clash of personalities and opinions. No matter a trader’s experience, there could be a conflict between what the signal suggests and what the investor may inherently believe about a market.
This clash will lead to indecision, or they will start adopting another system’s trading styles too far away from what they believe to be the right way to trade.
Many of the trading community members feel that signals are useless, which is true in some cases. However, there is not much data reflecting the success rate of these services. The problems usually arise when traders rely on signals like a crutch and disregard educating themselves.
Signals can be something of a beneficial tool. For instance, if a new trader was considering to be a day trader but had no experience, they could consider a service producing these kinds of signals.
They would then feel what it’s like to be a day trader, learn the various strategies, etc., shortening the learning curve and providing them with some form of mentorship. The ideal situation is for traders to branch out on their own without the reliance on signals.
Therefore, we should consider this a temporary solution rather than a permanent one because the most successful and profitable traders rely purely on themselves to trade the markets.