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An Introduction to using Signals as Tools in Forex Trading

By : Nick Moseley
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Prices in Forex trading are the most volatile - violent even - of any investment type. They change further and quicker (typically) than shares, bonds and even commodities (though commodities can be pretty hair raising too!) This presents non day traders with a problem - As you can't sit by a screen all day looking for price shifts in real time you risk (a) Losing bigtime on your open trades and/or (b) Not getting into new really hot ones. But there is a solution - You use signals and a signal service.

Forex signals are buy and sell indicators based on technical analysis. Technical analysis uses historical price and volume data to statistically analyze trends. The aim is to zero in, with a explicit probability, the odds of future price movements.

A signal may be as simple as 'Buy euros now at 1.1901'. Those signals are presented in any number of ways, by email, SMS text message to a mobile phone, IM message etc. Some are simply flashing text and/or icons on trading software. The software system incorporates built-in algorithmic rules that use the formulas of technical analysis, aggregates it with current market data and produces a signal.

For instance, one generally practiced technical indicator is something called MACD (Moving Average Convergence/Divergence). Without getting in particulars here, it uses the moving average - the change in an average price over time. A signal can be returned when the value of MACD crosses above (or below) a pre-determined threshold. Buy when it moves above the line, sell when it falls below.

Some signal services allow clients to automate the process of Forex trading even further. You can leave standing orders that when a certain signal is generated, carry out the recommendation. You get an email recommending 'Buy euros now at 1.1901' and the broker automatically enters an order to do just that.

As with any investment instrument, it has to be used intelligently in order to avoid disasters. Entirely automating your buys and sells can amount to automatically losing money. Using a signal service can make your life easier, but never abandon your investments entirely to an automated service.

If you plan to do that, you may as well simply turn your investments over to a broker with the instruction: 'Maximize my returns, but keep the risk down to a reasonable level'. Sensible, but not helpful if you want to control your destiny.

Signal services are definitely useful, however. They can relieve investors of the need to continually monitor prices. They can simplify the sometimes bewildering complexity of charts. They can help the investor make better decisions about when to buy or sell and at what price.

All that comes at a price, of course. Signal services range from $50-$250 per month, though some are cheaper and a few are more. Only the individual investor can decide whether the cost is justified. As with any trading service, if you make more than it costs than you would without it, that's profitable.

But, buyer beware. There are dozens of firms that will be happy to take your money. Whether their analysis, and therefore, their signals, are worth anything is a learning experience all its own.

At minimum, investors should use order types that help control risk. Stop-loss orders, limit orders and other common types are an essential means of limiting losses and timing buy and sell orders. That technique, commonly employed in stock trading, is even more critical in the volatile world of Forex.

About the author:
From London, Nick now lives in Stockholm with wife Lena and Gunnar a Border Terrier. He likes making money from investments that are as cunning as a fox and go up even when the markets go down! If you're thinking about trying to extract profit from the esoteric murk of forex then he suggests you start small and simple. See http://www.commodities-futures.info for info on an easy start low investment trading platform


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