As a beginner, foreign exchange market can be very hard to predict. For instance, you had wished for a position to go into your favor, but in reality the price somehow moved against you, repeatedly. That's why you need trade signal to guide you.
Trade Signal. What Is It?
In a nutshell, trade signal is cue or hint produced by indicators or some form of technical analysis measurements. With the help of trade signal you can get hints where price will likely move. It's like using GPS to find where the destination is from your location, so you don't have to get lost again!
To start using trade signal, the first thing you need is a trading terminal that can support it, such as; MetaTrader4 (MT4), MT5, cTrader, etc. From there, you can select one of available technical indicators. Here's one example (MT4):
See, there are many technical indicators swirling on the chart above. Basically, each indicators produces two different trading signals, either buy or sell signal. More so, you'll also need different approaches to get reading from each of those tools. Don't worry, I have already covered it for you.
Categories of Trade Signal
Trade signals mainly come in two different classes, either lagging or leading indicator. Here are the following details:
a. Lagging Indicator
In general, lagging indicator can only compute variables on existing market data. Therefore, it can only output trade signals backward (from present to past) onto your chart. However, you can still use this laggy indicator to weigh in the likelihood of market price direction.
Simply put, it's like your friend who is always coming late to the party and somehow manages to look cool and convincing.
b. Leading Indicator
Conversely, leading indicator projects its trade signal forward (from present to future) onto your chart. In fact, you can use it to predict market price direction. But worthy of note, even this seemingly miraculous tool can mislead you, if you're not careful.
To lead or mislead
How to Get Trade Signal
On this part, you'll learn how trade signal occurs. Here's the following step:
1. There's many basic indicators you can choose from you trading terminal. To do that, you can bring it up via dropdown menu on MT4. Like so;
2. If you're a complete beginner I suggest you to pick the simplest and easiest indicator, which is Moving Average.
3. Bring up two Moving Averages. Specifically, a shorter period MA (7) and a longer period MA (21).
4. Watch how trade signal occurs. In this case, get ready when a shorter period MA (red line) crosses over longer period MA (blue line). For example, buy signal occurs when red line crosses above blue line. Conversely, sell signal pops when red line crosses below blue line.
What to Do When Trade Signal Occurs?
When a trade signal occurs, don't react to soon. That's because many false readings or fake signals can lead you into a pitfall trap. Instead, consider these conditions before reacting to it:
1. On what time frame it occurs?
Time frame determines how frequent the chart records each session of market activity. For example, hourly time frame (H1) produces each tick of bar or candlestick per hour, simple, right? If you still don't know what I'm talking about here's how it looks:
The smaller the time frame is, the higher chance you'll stumble into false reading. That's because small time frame (m1, m5, m15, m30, and h1) produces so many tiny candlesticks that is confusing and misleading. In short, it's more trouble than it's worth. To alleviate that, you need to look at more precise time frame. Stick to daily (D1) or H4 time frame for better and more accurate trade signals.
2. Is there any conflicting signals?
If you use more than one technical indicators there's a chance that you'll get conflicting signals. For example, when an indicator produces buy signal, another indicator contradicts it with sell signal. In that case, take your time to consider which signal makes more sense or stop trading altogether.
3. Any major news going to be released?
Global macro-economic news update are the major foreign exchange market price driver. More importantly, the price movement is so volatile, it can out-scale and put your indicators into haywire. Subsequently, your trade signal quality is lowered during major news release. My advice, friend, pack your baggage and roll out a picnic mat. Forget trading during news release. Unless of course, you know what you're up against.
4. Is it near support or resistance level?
Not every beginner understand what support or resistance level is, even though it can help so much. Basically, those levels are visual aids to alarm where price direction is very likely going to reverse, or simply an end to current trend.
If your technical indicator shows a buy signal near a support level, the accuracy is increased significantly. Same case is also true when a sell signal pops near a support level.
How Accurate is Trade Signal?
In live trading condition, there is no such thing as 100% success rate due to market inefficiencies. So, if you think there's a trade signal that will work 100% accurate, all the time, prepare to get punished
In fact, every time you decide to follow up a trade signal, you are subjecting yourself to potential risks. In other words, if you open a position based on a trade signal, there's still a chance that the price will move against it, thus incurring loss to your account balance. That's the very reason why you should cool your head and act accordingly whenever a trade signal pops from your indicators. Let me rephrase it, never rush any trade signal without further confirmations.