Forex Signal System: What it is, How it Works

What Is a Forex Signal System?

A forex signal system is a set of analyses that a forex trader uses to generate signals to determine whether to buy or sell a currency pair at a given time. Forex signal system decisions may be based on technical analysis charting tools or news-based events.

A signal system for trading forex usually contains several different signals that work together to create a buy or sell decision. Trading signal systems may be available for free, for a fee, or are developed internally by traders.

Understanding Forex Signal Systems

After analysis, a trade signal triggers an action to either buy or sell a security or other asset. The trader can complete that analysis using technical indicators, or it can be generated using mathematical algorithms based on market activity and other economic indicators.

Several technical indicators are available for traders to study, including a moving average or the stochastic oscillator. Chart patterns like head-and-shoulders, rounding bottoms, flags, and pennants may also be employed. In addition, many traders develop their unique indicators, sometimes with the assistance of a qualified programmer.

A trade signal can be complex; however, traders tend to keep things simple by using a small number of inputs. It is easier to manage a simple signal generator and periodically test it to see what components need adjusting or replacing.

Too many inputs introduce a complexity requiring more time and as markets change over time, often with great speed, complex strategies could be rendered obsolete before testing is complete.

Developing a signal approach to trading or investing is the precursor to developing a fully algorithmic or even automated trading system. High-frequency trading (HFT) is one such example. These systems use signals that are generated on the millisecond scale to trade in and out of various positions hundreds to thousands of times a day.

How to Use Forex Signal Systems

Forex signal systems can create trades that are either manual or automated. A manual system involves a trader with a computer, looking for signals, and interpreting whether to buy or sell.

An automated trading system involves the trader "teaching" the software what signals to look for and how to interpret them. It is thought that automated trading removes the psychological element that is detrimental to a lot of traders.

Signals can come from other currency pairs, bond prices, commodity prices, and stock prices. For example, a day trader may have a signal to sell a particular currency pair when a certain stock index trades through its 100 or 200-day moving average. 

Forex signals send information through a variety of platforms depending on the software used and the trader's preferences. For example, a trader can receive the signals via email, WhatsApp, Skype, and similar apps. The best forex signal systems don't just relay a buy or sell to a trader, but also provide detailed information on why the action is the right one at the moment.