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What are Forex Signals and how they work?

Introduction

Diversification, low start-up costs and the ability to generate a side-income are three of the key reasons why Australians invest in the Forex Signals.

Another reason is that you also have the opportunity to expand your wealth creation opportunities and access the largest financial market in the world.

But as with trading any financial product, there are financial risks you must take into account, including the possibility of losing more than your starting balance.

Let’s jump straight into the explaining why Australians invest in Forex Signals.

1. What are Forex Signals?

Forex Signals offered by Forex analysts and traders have been around since the early 2000’s and continue to be popular in 2018.

A Forex Signal service is where a person or team of individuals are running their analysis across the broad spectrum of Forex pairs and giving you complete buy and sell signals.

These signals are normally sent out via mobile phone (SMS), email and some will even phone you up to confirm taking the signal (more old school). Some signal services will auto execute each buy and sell signal direct to your account to make the trading part even easier.

Forex Signal Chart

A Forex Signal service is designed to give you the opportunity to piggyback on their trades and overcome the challenge many traders face of not being able to build their own trading systems or design their own trading strategy.

Forex Signal services are great for time-poor traders.
2. Forex Signal services are great for time-poor traders

You are no doubt aware of the time and effort it takes to build Forex trading systems.

A trader needs to focus on entries, exits and sensible risk management strategies and combine all of that with daily focus, discipline and the ability to execute in a timely fashion.

Let’s also keep in mind the amount of system testing, backtesting and forward testing that a skilled trader will conduct before setting their system live.

Traders often spend dozens of hours testing entry strategies, then dozens of hours honing their exit strategies.

Once they have their shortlist of ideas, they then need to combine entries and exits, overlay some risk management strategies and then backtest their systems over a long enough period to gain confidence in their new system.

For most people, this is all too much. Because it takes true dedication to spend hundreds of hours building and testing trading systems, which means looking at screens all day focused on Japanese candlesticks.

Execution of Forex Signals

By now you are probably starting to get a clear picture of how Forex signal services became popular.

Which leads us to the main benefits of using a Forex signal service.

But before we jump into the benefits of using Forex signals, let’s cover the risks.

3. Risks of trading Forex

When you take a position on any Forex pair, you only need a small amount of money up front to control the total position.

Forex trading is leveraged trading.

When you take a position on any Forex pair, you only need a small amount of money up front to control the total position.

For example, $1,000 might allow you to control a $30,000 position. This is 30 times leverage (30 times $1,000 equals $30,000).

One of the greatest risks of Forex trading is the fact that you can lose more money than what you start with.

So it goes without saying that trading Forex is risky. Which is why the best operators apply strict money management rules. This allows them to allocate just a small fraction of their overall capital at risk in any one trade.

Whether you trade Forex on your account or subscribe to a Forex signal service, you must focus on capital preservation and only ever risking a small percentage of capital on any one trade at any one time.

With that in mind, let’s discuss the pros and cons of using a Forex signal service.

4. Three benefits of using Forex Signals

As mentioned at the start, building Forex systems take time, focus and persistence.

Trading the Forex markets takes skill.

  • 1. Time

As mentioned at the start, building Forex systems take time, focus and persistence.

It is not uncommon to hear of traders spending a full month trialling, testing and running through trade ideas only to hit a dead end.

 The number one benefit of using a Forex signal service is to leverage the time, effort and money the signal provider has spent in building their trading system(s).

  • 2. No coding

There are two main types of traders in this world. Discretionary traders and systematic mechanical traders.

Both discretionary and mechanical traders have a full set of trading rules including entries, exits and risk management.

But a discretionary trader can use their discretion to ‘override’ their trading signals.

For example, if they were to get a conflicting entry, they may decide to skip the trade and wait for more confirmation. Or they may feel this entry technique is an A+ entry setup. One of their best. As a result, they feel they should double their risk on the trade as it is their best entry setup.

One of the great things about the Forex markets is the ease of access to be able to code your trading systems in and have the computer trade on your behalf.

One of the most popular trading software available in the world is MetaTrader 4 (MT4). MT4 has what are known as expert advisors.

Expert Advisors or EAs, allow you to code your entire system in and have every buy and sell signal executed automatically on your behalf.

Forex Signal Systematic trading

A systematic mechanical trader has extremely clear-cut rules. Their system is black or white. There are no grey areas.

But the challenge here is you need to know how to code.

In MT4, their language is known as MetaQuotes Language 4 or MQL4 and is based on the C++ programming language.

The good news is, if you use a signal service, you don’t have to learn how to code. You don’t have to spend the days, weeks, months and years testing your systems electronically to build a trading edge.

  • 3. Transparent track record

Another positive for selecting a Forex signal is the ability to view the history of the strategies’ recent performance.

In many cases, you can view the last 1-2 years of history. The more, the better.

While being able to view the historical results is great, it is still no indication of what the strategy will do in the future.

You must also ask the strategy owner if the results are hypothetical (ie. to what extent are the results generated from backtesting only with no live trading) or are based on live trades.

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# Transaction fees still apply from the external broker please refer to FSG.

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5. Two disadvantages of Forex signals

You never truly get access to the exact system rules. You will never know exactly how their system works. Without them, you will not be able to trade the market.

  • 1. Access to the system

You never truly get access to the exact system rules. You will never know exactly how their system works. Without them, you will not be able to trade the market.

You could consider the idea of using a Forex signal service like buying a ‘black box trading system’. A black box is a computer-generated signal service where you never know the exact entry or exit criteria. Those details are hidden from you.

  • 2. Reaching expert status

As a result of following their signals, you may never develop the skills necessary to trade the markets yourself.

You may spend years following signal services and breakeven. So after a few years, you have broken even, and you don’t have any skills in developing your systems.

Think of the saying ‘You give a man a fish, and you feed him for a day. You teach him to fish, and you feed him for a lifetime.’

If you are after mastery, then a Forex signal service may not be suitable for you.

6. Are Forex Signals reliable?

One of the number one questions we hear all the time is ‘How reliable are Forex signal services?

The biggest challenge we find with clients all over the world is managing their expectations.

Unfortunately, many may hear about our services from an overly enthusiastic friend who tells them how ‘easy’ it is to make money. Just follow their signals.

Setting expectations is a big part of our job when we first start talking with a potential client.

Forex is a difficult business. You do not win every trade.

Going through sustained losing periods is possible. These are called drawdowns. This is where your account equity continues to fall without a winning trade.

The good news is, the historical information is available on every Forex signal service (ie. either actual, hypothetical or a combination of both).

This means you can view the winning and losing percentage of trades, biggest win and losing trades, largest historical drawdown, profit factor, the expectancy of the system and so much more.

forex signal return expectation

So while it is possible to have a few winning months in a row, it is also possible to have a few losing months in a row.

Statistically speaking, you should be able to see the good and the bad from the historical trades.

This is ideal in reshaping your expectations if your referring friend is excited about their progress.

7. Your capital

The important thing to note with any Forex Signal service is that you always control your money. The service provider should never have access to your funds in terms of withdrawals.

Their setup may allow trades to be automatically executed on behalf of your account, but you also set that up when you first get started.

The bottom line is, you can choose the level of capital allocation. You can choose the level of risk you take on for every trade.

You are in control of your capital regarding risk allocation and can start off risking a relatively small amount on each trade, or you can be more aggressive.

A professional signal service provider will walk you through all the options available, so you:

  • Feel comfortable with the risk and reward of their system
  • Only have to risk a small amount of your overall capital on every trade
  • Match your expectations with the historical returns of the system

Here are the steps to get started:

1. Schedule an appointment (Conference Call) with an Investment Manager

2. Submit a Managed Discretionary Account (MDA) application with Walker Capital Australia.

3. Open a trading account with the Walker Capital Australia’s executing broker.

4. Select from our range of investment strategies and choose your asset allocation between the choices of accounts.

5. Once all accounts are opened, and funds have been chosen, our team gets to work and begins trading.

We welcome you to give our team a call to discuss your investment goals and objectives.

You can call Walker Capital Australia on +61 2 8076 2210, and we’ll see how we can help you achieve your investment goals.

Try our Managed Investment Calculator to view Hypothetical Results based on Real-time Trading Data:

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