Learning to trade Forex has a lot in common with learning how to buy and sell traditional stocks. Yes, the core assets are very different, but many of the trading techniques are strikingly similar. For example, stock traders and Forex traders both put a lot of trust in average price lines. But, of course, there are some unique features of Forex signals you need to learn in order to earn a consistent profit in the market. Here are some of the key concepts related to Forex signals:
Indicators
Indicators are the building blocks of signals. For example, in typical stock market trading, some investors watch price and volume data. When stock ABC, for example, moves above a certain price and trades above a certain volume, those two indicators, taken together, might be considered a signal to buy ABC stock. The price is going up and has crossed an important threshold, and many traders are buying it.
Whether valid or not, a common stock market signal is based on those two indicators, volume and price. In Forex trading, there are hundreds, perhaps thousands, of indicators like price, volume, moving averages, price floors, price ceilings and other kinds of statistical data to rely on. When indicator X and indicator Y and indicator Z all occur simultaneously, that could form a trading signal to either buy or sell.
Other Factors
Choosing a broker is the first step in the journey toward becoming a successful Forex trader. No matter how many indicators you follow or how many signals you rely on, if you don't have a broker that offers fast trade execution, reliable order fills and educational tools, then you are starting off on the wrong foot.
Moving Averages
The most common trading signal is based on moving averages. Many Forex traders watch the 50-day moving average price of a currency pair and compare it with the 10-day moving average. If the line formed by the 10-day average crosses above the 50-day line, that would be a standard "buy" signal. The reverse, when the 10-day average crosses under the 50-day, would be a "sell" indicator. In most cases, signals are based on two or three indicators.
Trade Volume
Volume can be both an indicator and a trend. The reason for that is the huge importance that volume plays in Forex markets. If millions of investors are buying a particular currency pair, there has to be a reason. Many people simply look to trade volume and when it reaches a certain point, they buy. When it sinks to a certain level, they sell. Another way to use volume is as part of a set of indicators to form a signal. For example, when a currency pair's 10-day moving average reaches a certain point and volume also hits a particular level, that could be a buy signal for many investors.
Bollinger Bands
A proprietary signal, called Bollinger Bands, is in common use among Forex and stock traders. The bands are a statistical range of price action that can show "narrowing" or "widening" of price action. Many traders believe that when the bands narrow, a currency pair is about to make a large move upward or downward.