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 any given time. Forex signal systems could be based on technical analysis charting tools or news-based events. A signal system for trading forex is usually made up of 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 the traders themselves.

Key Takeaways

  • A forex signal system is a set of analyses that forex traders use to generate trading signals to determine whether to buy or sell a currency pair at a given point in time.
  • Forex signal systems are based on technical analysis, news-based events, or both, that include several different signals to determine a buy or sell decision.
  • There are a variety of forex signal systems that can be used for free, for a fee, or developed by a trader themself.
  • Forex signal systems can create buy or sell trades that are either manual or automated. Manual ones involve a trader waiting for a signal and taking action while automated ones are set for the system to take action on its own.

Understanding Forex Signal Systems

A trade signal is a trigger for action; either to buy or sell a security or other asset, generated by analysis. That analysis can be human-generated using technical indicators, or it can be generated using mathematical algorithms based on market action, possibly in combination with other market factors such as economic indicators.

A growing number of technical indicators are available for traders to study, including those in the public domain, such as a moving average or the stochastic oscillator, as well as commercially available proprietary indicators. Chart patterns like head-and-shoulders, rounding bottoms, flags, and pennants may also be employed. In addition, many traders develop their own unique indicators, sometimes with the assistance of a qualified programmer.

Most indicators have user-defined variables that allow traders to adapt key inputs such as the "look-back period" (how much historical data will be used to form the calculations) to suit their needs.

There is no limit to how complex a trade signal can be. However, traders tend to keep things simple by using only a handful of inputs. For practical purposes, it is far easier to manage a simple signal generator and periodically test it to see what components need adjusting or replacing.

Too many inputs would introduce complexity requiring more time than a trader has to offer. And since markets change over time, often with great speed, complex strategies could be rendered obsolete before testing is even finished.

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.

Using Forex Signal Systems

Forex signal systems can create buy or sell trades that are either manual or automated. A manual system involves a trader sitting at the computer screen, 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 that when a certain stock index trades through its 100 or 200-day moving average their signal says that they should sell a particular currency pair. 

Forex signals send their 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 other similar apps. The best forex signal systems don't just relay to a trader to buy or to sell, but also provide detailed information on why the action is the right one at the moment.