Signal Trading With Forex



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Signal Trading With Forex

07.06.2010 20:22 Monday
Since online forex trading became available in the late 90’s, the number of consumers involved and the number of brokers have multiplied quickly. This has been followed by innovations in trading software and trading education. The positive result is that you can now find as much information online as you might need. Here are a few tips that will direct you if you are interested in signal trading.

What Does it Mean?

Signal trading is a method that developed out of other methods for technical analysis. The way it works is that you base your trading decisions on a certain group of technical signals. When these pre-determined conditions are fulfilled, you know to buy, sell, or close a position before you lose any more money.

The signals that traders use vary from strategy to strategy, but several basic signals are quite common. These include patterns in prices, resistance or support in trading levels, as well as a wide array of technical signals. Let’s zoom in further on several of these:

Patterns in Price

If you chart the prices on any commodity, security, or currency swap, it’s hard not to notice patterns. Of course, there are whole strategies built on trying to objectively measure these patterns. Often, price patterns simply reflect the hysteria of group psychology in the market. But there is enough here to derive some legitimate insights.

For instance, a trader might notice that prices tend to cycle by working up to a certain point before falling back down to another key point. If this pattern is consistent enough, you should be able to set a trading signal at one end of the cycle and a stop point at the other. This then gives you an objective signal for entering the market or for getting back out.

Resistance and Support

These concepts describe trends or momentum in the direction prices take. With every investment, there are certain levels which prices resist going above or below. Often, these have to do with real-world inherencies in the commodity or currency. At other times, it represents psychological points such as round numbers. When pressure from demand keeps prices from going further down in a pattern like this, it is easy to set up a buy order at the support levels and a sell order at resistance levels. Of course, you can do the same thing in reverse with a forex broker. It is important to always set up a stop-loss order just outside of the support or resistance, as a safety reserve.

Technical Indicators

There are several analytical and statistical indicators that can also direct purchase or selling decisions:

The Relative Strength Index (RSI): This measurement indicates when the market is oversold or overbought. If you see 70 or above, it is overbought, and 30 or below indicates an oversold condition.
Moving Averages: This is a common statistic showing what a price averaged over a previous period of time—usually 30 days, but sometimes longer. This lets you see what an underlying asset might be worth in the longer term.
Bollinger Bands: This sophisticated statistic measures prices against volatility within a given period of time. When the market approaches the low end of the band, you should buy, and when it reaches the top you should sell.

Of course, other sophisticated methods also exist, and there is always more to learn. Fortunately online education is also available to get anyone started. The important thing is to form a cogent and well-informed strategy and stick with it consistently.