What are trading signals and how do they work? Pros and cons
Being involved in the stock market and trading fields, trading signals are the first services that traders use. It is a help of capital importance, both for beginners and for professional investors.
With the rise of the web, it becomes difficult to recognize good sources of information for this type of service and exposure to scams becomes more important. Therefore, we take up the topic of trading signals and give you all the tips to take advantage of them.
What are trading signals?Trading signals, by definition, are alarm bells that signal the slightest trading opportunity in a market. Trading signals allow the trader to know when to sell or buy a financial asset without the need for any price analysis .
This information helps the investor to identify the best asset to trade and speculate without having to know the type of market. Thanks to trading signals, the investor knows where to place his “stop loss” and his “take profit” in order to take his profits on time and avoid possible losses. In addition, this service helps the merchant to deepen his knowledge or learn new ways of doing his job.
The best trading signals bring profit to traders and explain the reasons for the different positions taken. For this, the trader must pay attention to the choice of a good provider of trading signals.
What criteria should be considered when choosing a trading signal provider?Choosing a good trading signal provider is the first step to ensure great results. How to do it? Here we have listed some points that will allow the trader to get the best trading signals :
- Assess the number of positions taken by the trading signal provider;
- Check the number of successive positions closed in positive;
- Check that the provider offers analysis or feedback on your trading signals;
- Pay attention to the business history of the chosen supplier;
- Make sure there is a way to interact with your provider;
- Reading the opinions of other investors can be of great importance.
How do trading signals work?Trading signals represent all the data that allows traders to position themselves or not in the market at any given time. They are used by many traders to identify potentially profitable trading opportunities .
In fact, it is thanks to the signals that the trader will know whether to buy or sell a currency pair for profit without having to perform analysis. Therefore, Forex signals allow the trader to improve his trading activities. However, how do trading signals work?
Specifically, trading signals come from predictions of high-potential transactions in the forex market in real time. They can be generated manually or automatically.
hand signalsForex hand signals are obtained by professional traders or analysts using fundamental and technical analysis. The trader's experience can also influence decision making. Manually issued signals can adapt to market changes.
The downside here relates to the impact of the trader's human emotions, which can influence his analysis and cause misjudgment.
automatic signalsAutomated signals, on the other hand, are generated directly by software designed to track and analyze market price action using algorithms. Once the algorithm's predefined parameters are met, the signal is automatically triggered.
The advantage of automatic signals lies in the absence of human emotions. However, they are not as well adapted to the market. In addition, the signals provide investors with all the information about the asset to be traded, as well as the moment when it will be necessary to position yourself in the market to expect a profit. This information is available in real time.
Therefore, the Forex signal becomes useful only when the trader receives it on time. The generated signals can become untenable when the trader receives them late.
Which strategy to choose for trading signals?Generally, trading signals follow a well-defined strategy. There are several strategies that the trader should know:
Trend following trading signalsThe trend following strategy relies solely on analysis to determine the direction of the market . This is a strategy widely used by many traders. It provides positive returns by taking advantage of market dynamics. In concrete terms, how does that work?
Trend-following traders buy a rising asset because they believe the market will continue to rise. Conversely, when the market goes down, they resell the asset. They do not use any fundamental analysis and simply follow the trend. Is this strategy beneficial?
The trend following strategy states that you should sell when the market is down and buy when it is up. This strategy is useful and can prove beneficial as there is always a tendency to break out in the market.
However, the reality is more complex. In fact, the signals of this approach regularly generate losses given the calm phases and unforeseen movements.
Range Trading SignalsRange trading is a strategy that takes advantage of market consolidation. What is market consolidation? This term refers to the state of the market that remains stuck between support and resistance .
Range trading signals, therefore, focus on short-term price changes. Like the trend following strategy, range trading also relies on technical analysis to spot high potential trades.
Should I use this strategy to trade? Range trading can make it possible to benefit from very attractive returns. However, trading under this approach takes time and requires a perfect command of the tools of technical analysis.
Breakout Trading SignalsBreakout trading signals use a strategy to enter the market after the breakout of support or resistance. Support or resistance refers to the level formed by the rise and fall of prices. The break of a support generates a sell signal while the break of a resistance generates a buy signal.
This approach allows you to take a position on a financial asset. It is used in most trading strategies based on technical analysis. Why trade this strategy?
Support/resistance breakouts happen all the time in the forex market. This allows you to find high-potential buy or sell opportunities in the market. However, there is a downside to this strategy. The price levels sometimes become unclear or even incorrect.
investment trading signalsThis strategy involves identifying when a trend will change direction. This can be very useful as it allows you to protect your positions by either shorting your position or taking a position going against the trend.
Trend reversals occur in every unit of time and can occur in any direction. These are bullish reversals and bearish reversals. Upside reversals indicate that the market is moving down and will soon go up. Conversely, bearish reversals indicate that the market is shaded at the top of an uptrend and is likely to turn into a downtrend.
The main advantage of using this strategy lies in the possibility of developing profitable trading systems in the long term. However, to achieve this, it will be necessary to identify fake reversals.
For a trend reversal to be considered false, certain conditions must be met:
- The market is in an extended trend;
- The market is changing;
- The trend change is not powerful enough;
- The market moves for a moment in a sideways movement;
- The market returns in the direction of the initial trend.
Why use trading signals?The sole purpose of trading signals is based on the possibility of making a profit in trading , by buying and selling assets in the financial markets. There are two options for traders: use a trading strategy or use trading signals.
Trading signals are based on the experiences of different professional traders and predefined algorithms. They are an easy way to determine »when to buy», »when to sell», »at what price to sell» and much more. Thanks to these, you can trade without having great knowledge in the trading sector.
Certainly, trading is an activity that requires real commitment and work. But using trading signals makes the process easier. In fact, there are multiple reasons to use trading signals. The most important are:
- Improve the profitability of the investment and expand the scope of the benefits in the different financial markets;
- Earn significant profits while learning how the market works (methods to trade effectively, learning curve analysis, etc.);
- Get information about the behavior and price of shares without being frequent in the market;
- Provide coverage on the assets to be traded (cryptocurrencies, raw materials, shares, stock indices, etc.).
However, when the trader does not have enough experience to accurately predict the movement of assets , he will have to get free trading signals or paid trading signals.
Trading signals: pros and consWhether early or during their career, traders exploit trading signals to gain better profitability and refine their position. Even if some traders are reluctant to deal with trading signals, they provide many advantages.
Pros of trading signalsLike road signs, trading signals are a kind of warning about risks and/or opportunities. They are used both in the foreign exchange market and in other markets. Therefore, trading signals allow, among other things:
- Save time and energy by performing your technical analyses;
- Provide assistance to novice traders by helping them set Take Profit (taking profit) and Stop Loss (when the market moves negatively) exit orders;
- There is no commission to pay in return when you make a profit;
- Learn new trading strategies and put them into practice;
- Imitate the trading methods experienced by other traders;
- Choosing a trading style appropriate to the approximate risk threshold set by the trader;
- Speculate correctly on the stock market;
- Open a long position (buy) or a short position (sell) to exit trading positions at the right time;
- Significantly increase the return on your investment, especially for newcomers to the commercial sector;
- Understand the reasons for the rise and fall in the value of a stock or currency pair;
- Being constantly informed of the position of the assets in the financial markets (raw materials market, stock market and foreign exchange market).
We recommend choosing your signal provider based on your success rate. The closer to or better the 60% success rate, the more profitability increases.
Cons of trading signalsAs for the disadvantages of trading signals, here are a few:
- Subscription to a payment subscription (monthly or annual) without being certain of the reliability of the exit or entry offers received;
- Taking a position in the market, based on unreliable information, especially when you don't actually know the actual rules governing entry and exit signals;
- Non-existence of a profit guarantee, that is, one can follow the trading signals and have losses in the financial markets;
- In case of loss, only the account owner covers all costs, the signal provider cannot bear any responsibility;
- A high risk of practicing spontaneous trading without taking the time to optimally and rationally analyze all the opportunities presented.
Despite the various possibilities and advantages, prudence requires that you do some analysis yourself. In this case, the position taken in the stock market or in the foreign exchange market does not depend on a third party. It depends exclusively on the decision of the merchant.
Trading signals provide considerable help to all categories of traders. The use of trading signals does not in any way guarantee complete success, but rather constitutes assistance support. The beginner trader has the advantage of quickly making his investment profitable from the first operations.
As for experts, trading signals allow you to perform and test various markets. However, these signals must be used tactfully and ingeniously to avoid doing the same thing.
ConclusionTrading signals are alerts about trading opportunities based on market analysis. These signals offer enough advantages for the investors who use them. They allow you to take advantage of the experience of experienced traders or expert financial analysts.
Free trading signals allow traders to understand some important variables in order to earn attractive returns. Novice traders use it to start trading while they wait for the end of their training. The most advanced traders use them to refine their analysis and improve their personal trading.
However, like all investment techniques, trading signals do not only have advantages. They can cause a strong loss of autonomy in trade. The investor no longer refers to his analysis to place his orders. He becomes addicted and finds it difficult to trade without the signals.
Also, using signals does not guarantee traders a certain return, because good signals are rare. Of the many signal providers out there, there are many that offer fraudulent signals. Therefore, it is important to stick to trusted providers like eToro.