Free Forex Signals Explained
For some traders, especially the beginners, going through dozens of currency pairs and their charts in order to find suitable trades can be a difficult task. After all, it can happen that the market participants can not find any entry point with any currency pairs.
This is where the free Forex signals can be a handy tool. All traders need to do is to check the latest FX signals online and analyze the viability of executing such trade. Generally, the free trading signals at the Forex news websites, include the following pieces of information:
- Currency pair
- The current market exchange rate
- Entry price
- Recommended Stop-Loss order
- Recommended Take Profit order
- Current status of the signal
The last item on our list identifies the status of the signal, which means that if it says ‘active’ then this means that this trading recommendation is still active and traders can make use of that. After some time passes, the signal might be close due to changing market conditions. Consequently, this means that those signals are no longer active and should be ignored.
Benefits of Using FX Trading Signals
There are many free Forex signals online traders can use as some sort of guide for entering new trades. Instead of checking and analyzing the charts of dozens of different currency pairs, traders can just take a look at the recommendations and only focus on those securities.
To illustrate this point better let us take a look at this 1-hour Heiken Ashi USD/CHF chart:
The fact of the matter is that recently several Forex news websites issued a new trading signal, recommending traders to buy the USD/CHF currency pair. Looking at the chart above, their line of reasoning seems quite understandable. After reaching the bottom at 0.9060 level during the July 31st session, the pair seems to be recovering.
In fact, after this development, the US dollar has already risen all the way up to 0.9173 level, which is 113 pips higher than several days ago. The several numbers of green candlesticks on our Heiken Ashi chart seems to confirm the view that the currency pair might be at least in a short term upward trend.
In addition to posting the latest Forex free signals online, many websites also publish the statistics about the past rate of accuracy of their trading recommendations. This enables traders to compare different sites and determine which one offers the best free Forex signals.
Imperfections of Free FX Signals
Despite all of the benefits of using free Forex signals, it is important to point out that they can not guarantee a 100% success rate. In fact, they have several imperfections. Firstly, it is essential to realize that each trading signal is determined with a particular time frame in mind. For example, some signals might be derived from 5-minute charts, while some others might come from 1-hour or even from a daily chart.
This is why the most Forex news websites do specify the time frame used for determining the signal. The fact of the matter is that in many cases the short and long term trends in a given currency pair might diverge from one another considerably.
In our previous example, we have already discussed the short term trends in USD/CHF pairs on a 1-hour chart. Now, let us compare this to the daily chart of the same pair:
If anybody analyzed the pair solely based on the previous chart, most likely one might have concluded that the US dollar was now in a solid upward trend against the Swiss franc. However, as we can see from this chart, the long term trend with the USD/CHF pair is quite different.
As the chart above demonstrates, the pair mostly moved sideways from the second half of March until late May 2020, without experiencing any significant gains or losses. However, from the beginning of June 2020, the pair began its slide. This downward trend especially accelerated in July 2020, the period where we can see 11 red consecutive Heiken Ashi candlesticks in a row.
It goes without saying that this can hardly be a bullish sign for this currency pair. We do have one green candle by the end of this chart. However, this one candlestick alone is not enough to call for the reversal. So we can see that despite the latest short term trading signal, the USD/CHF pair seems to be still in a solid downward trend.
As we can see from this example, one of the imperfections of trading signals is that they might be more useful for scalpers and day traders, rather than those market participants with long term trading time frames in mind. However, it is also worth noting that nowadays some Forex news websites do offer signals for long term traders as well, although not all of them are free to use.
Another major weakness of the trading signals is that they typically only focus on technical indicators. The fact of the matter is that traders might find the best Forex signals free of charge, but most likely they do not take the latest economic releases or events into account.
This can be problematic because we have many examples, where the major announcements or events have significantly altered the direction of the exchange rate. To illustrate just one example of this, let us take a look at this daily GBP/USD Heiken Ashi chart:
As we can see from the above diagram, the pound was moving sideways during Spring 2016, however, in June it developed a strong upside momentum with 5 relatively large green Heiken Ashi candles in a row.
Now from high insight, we all know what happened next. However, that likely most trading signals would have recommended buying GBP/USD. It is understandable, since at that time, there was no technical indicator, pointing at the possible dramatic collapse of the pound’s exchange rate. As mentioned, it was quite the opposite, with short term technical indicators pointing to the upside.
The fact of the matter is most likely technical signals had very little to do with the dramatic decline of GBP/USD. Instead, one of the catalysts for this move was the outcome of the European Union membership referendum in the United Kingdom.
The decision of the UK voters to leave the EU has led to a significant decline in the pound exchange rate, with the GBP/USD pair falling all the way down to $1.25 level just in a matter of weeks. In fact, this outcome also had long implications on the currency pair, since even after 4 years’ time, the pound never managed to return to $1.50 level with the US dollar, as it was before the referendum.
It goes without saying that events with such magnitude are quite rare. However, as we can see from this example, some events can have a dramatic impact on the exchange rates. Consequently, relying solely on the Forex trading signals and ignoring the latest fundamental developments, might not be the best strategy for long term success.
How Traders Best Utilize Forex Free Signals?
Considering the upsides and drawbacks of using Forex signals, the obvious question remains: to what extent traders should rely on this tool?
Well, traders can certainly use free Forex trading signals daily for coming up with new trading ideas. However, instead of simply copying the trades from those recommendations, traders need to conduct their own analysis.
Firstly, the market participants can check the time frame for the trading signal and compare it to their trading style. For example, the latest signal from a 5-minute chart might be very handy for scalpers or day traders, but it might not be that useful for long term traders.
The second stage is to take a look at the economic calendar and find out whether there are any upcoming economic news releases or other events that might have a significant impact on the currency pair in question.
If there is a high-risk event coming up, then traders might consider choosing other currency pairs for trading. This is because the market reaction to those announcements can sometimes be highly unpredictable.
Finally, traders might consider how the latest trading signal fits into their overall trading strategies. If the latest signal passes all of those tests, then it might be a good idea to go ahead and open the recommended position. On the other hand, if it fails one or several of those tests, then it might be a better idea for traders to consider some other options at their disposal.
The main idea here is for traders to make their own decisions, instead of deferring this process to Forex trading signals. It goes without saying that it is a handy tool, however, just like any other Forex indicators and strategies, it can not provide traders with a 100% success rate.