Forex trading signals are indicators used by Forex traders to indentify suitable entry and exit points for trading currencies. These signals are determined through raw market data using both fundamental and technical analysis. Fundamental analysis relies on macro economic factors or news that will have a direct impact on the exchange rate of a currency.
Technical analysis on the other hand relies on historical data to discern predictable trends that can help a Forex trader decide whether to enter a trade or not. These data are visually presented in various types of charts like line charts, bar charts and candle sticks charts. In addition, one can also classify these Forex signals obtained from these types of charts as leading indicator or lagging indicators.
Leading indicators are Forex signals that helps a trader spots trends before the actual changes in price movements occurred. By preparing a trader beforehand, a trader would be able to profit from the trend by buying at a low price and selling at a higher price. Examples of technical indicators that are leading indicators are oscillators like Parabolic SAR are used identify whether a trend is bullish or bearish. Conversely, RSI and Stochastics are used to identify whether a market is overbought or oversold. Thus when a market is regarded as an overbought market, a Forex trader should be selling. On the other hand, if the charts indicate a market is in an oversold condition for some period of time, it is natural to expect prices will be increasing in the near future.
Lagging indicators, as the name indicates, are opposite of leading indicators and provide a visual indication of the change in trends after it had occurred. This is especially useful for those traders who were unable to indentify the obvious changes. In short, it means the lagging indicator can be regarded as a wakeup call for the trader to get attuned to the market and follow the trend. Because lagging indicators only shows changes after they occurred, it would mean that they never give out the wrong signals. An example of lagging indicators are momentum indictors.
Although leading and lagging indicators provide Forex signals that can help a trader to decide whether to enter or exit a trade, at times they can provide conflicting signals. Hence, it is important for a Forex trader to rely on a variety of signals instead of one signal to try to get a bird eye view of the market. As such, Forex signals need to be interpreted correctly in order to ensure profitable trades. This aspect of Forex trading can be especially challenging for those traders who are uncomfortable in interpreting charts. If such is the case, a trader can use Forex signal services which are provided free or for a fee. Signals from Forex signal providers are already analysed by analysts for profitable trades thus saving a trader time and hassle.