Trading signals are an essential part of automated trading process, which includes forex trading robots, MetaTrader Expert Advisors (EAs), and so on, but they can also serve as a helping hand in discretionary trading, when decisions are made by traders themselves.
Although in some cases trading signals can be manual, generated by human, the more popular ones are algorithmic trading signals, which are generated automatically - automated trading signals.
If you are new to forex trading, you may enjoy the educational aspect of trading signals by using them on a Demo account or a small Live account, in order to speed up your learning curve and get full insight into the various methods the trading signals are based upon.
Automated trading signals
Automated trading signals can be found in most of the commonly used trading platforms, while coming under different names: Expert Advisors, scripts, signals, etc. Such signals usually constitute the main part of the trading robots - the part responsible for the analytical input. Most frequently, trading signals are based on technical analysis, however more advanced trading signal systems also tend to analyze economic news, financial statistics, market sentiment and utilize other metrics that require complex integrations and processing capacity.
Technical Indicators behind Trading signals
Let’s have a look at the most popular Technical Indicators behind Trading signals that are focusing more on technical analysis. Note that the most common metrics used in these indicators are trading volumes, average prices, various statistic metrics related to prices and volumes.
Moving Average indicator (MA):it’s a constantly updated and smoothed average price. A rising moving average indicates that the instrument is in an uptrend, while a declining moving average indicates a downtrend. An indicator combining 2 or more Moving Averages allows to check for intersections between the MAs, for example between the the 5-, 8- and 13-bar Simple Moving Averages (SMAs), where if 5-bar SMA appears above the 8-bar, while 8-bar SMA is above the 13-bar, then it’s an indication of an updtrend.
Bollinger Bands is an indicator defined by a set of trendlines tha are plotted two standard deviations away (positively and negatively) from a simple moving average (SMA) based on an instrument’s price. These settings can be user-adjusted. Bollinger bands divide the price chart space into three parts, the upper, middle, and lower brands. These bands are used to determine if the instrument is overbought or oversold.
Average True Range (ATR)
The Average True Range indicator is used to measure the market volatility on any timeframe, intraday or multi-day, for any instrument. In the forex market, measuring the volatility is a key component of a consistent trading strategy. There is known correlation between the increase in volatility and market reversal, while the decrease in volatility often means that the existing trend will continue.
Relative Strength Index (RSI)
The relative strength index, ranging from 0 to 100 levels, indicates where the price is likely to reverse. In case of an uptrend, when the price reaches above the RSI level 70, it indicates a high probability of bearish market reversal. Similarly, if the RSI shows that the price is at level 30 in a downtrend, this is a good sign of bullish market reversal.
Moving average convergence/divergence indicator (MACD)
MACD is truly one of the most used forex indicators, it consists of a histogram and an exponential moving average (EMA). The structure of MACD might seem a bit complex for the beginner: the MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA, while a 9-day EMA of the MACD line (the Signal line) is then plotted on top of the MACD line.
When the MACD line crosses above the Signal line, it’s a trading signal to buy, and when MACD line crosses below the Signal line - it’s a trading signal to sell.
There are various ways to set up and interpret MACD indicators, but the most common ways are crossovers, divergences, rapid rises and falls.
Relative Strength Index (RSI)
The RSI is another forex indicator that belongs to the oscillator category. It is known to be the most commonly used forex indicator and showcases an oversold or overbought condition in the market that is temporary.
The RSI value of more than 70 shows an overbought market, while a value lower than 30 shows an oversold market. Thus, several traders use 80 RSI value as the reading for overbought conditions and 20 RSI value for the oversold market.
Fibonacci indicator (Fibonacci Retracement Levels)
Fibonacci retracement levels are horizontal lines that indicate potential support and resistance levels. Each Fibonacci level is calculated as a percentage of a prior movement of the price, the standard levels are 23.6%, 38.2%, 61.8%, and 78.6%. Fibonacci indicator is totally scalable and flexible, it can be applied to find the levels between any two significant price points, such as a daily high and low.
Stochastic oscillator indicator measures the ratio between the current price and the price range over a number of periods. With the indicator values ranging between 0 and 100, the higher value suggests that the price is trending up. In a downtrend, the indicator values are in the low range. Stochastic indicator is commonly used in various trading signals to indicate price reversal. Values above 80 are considered as overbought region, a signal to sell, while levels below 20 are considered as oversold, a signal to buy.
Technical Indicators visualization
There are two basic visualization methods for technical analysis indicators on the instrument price charts:
Overlays:Technical indicators that use the same time and measure scale as prices are plotted over the top of the prices on the same chart. This applies to moving averages, Bollinger Bandsand and Fibonacci retracement lines. Such indicators can be plotted together on the same price chart, which allows to cross-check the ideas based on several indicators.
Oscillators:Rather than being displayed on top of the price, technical indicators that oscillate in a range between own local minimum and maximum are plotted above or below a price chart. Examples: MACD,Relative Strength Index (RSI), Stochastic Oscillator.
It is quite common to use several technical indicators when analysing a particular instrument, especially on different timeframes. It’s important to get familiarized with the basic settings of each major indicator in order to be able to combine them in th optimal way on one chart or to use in the trading signal or robot.
Integration with Trading Robots
Note that an automated Trading Signal alone cannot yet be considered as a trading robot. When creating a trading robot, it’s important to have additional checks, such as variable trade size, risk management and available margin checks, market volatility and market sentiment identification, and the logic of validation between these inputs. It makes sense to periodically test the trading robot on historical or realtime data to see if the components and their settings need adjusting or replacing.
Manual Trading Signals
Manual forex trading signals can be generated by other traders, usually those who are professional enough to pass various checks for performance in the ratings. One of the most popular examples is Trading Signals service by MetaTrader. The name might be a bit confusing because this service is not limited to “signals”, but allows to copy deals in realtime from one MT4 or MT5 user to another, either for free or based on a subscription model. All Signal providers are being carefully screened for performance consistency and credibility. If a provider's results over the previous month are falling below the benchmark,this Signal will be removed from the system.
However, if trading is disabled on the subscribers’ side, then such trading signals can effectively guide you through the market and indicate the levels of buys and sells. Usually the trading signals providers would provide a summary of the indicators and other inputs behind their actions, which makes it a unique tool for learning how to trade in forex and other markets.
Other products that are based around a similar idea of manually generated trading signals are Social trading, MAM (Multi Account Management and PAMM (Percentage Allocation Money Management), unless they are managed by an algorithm, which is sometimes hard to tell.
AnalysisIQ / Signal Centre Tool by Acuity Trading
If you ever thought about having the most sophisticated market analysis directly in the trading platform, which saves hours that you would otherwise spend on browsing through trading ideas, news and technical analysis charts, then you have to try out the latest AnalysisIQ / Signal Centre Tool provided by Acuity Trading.
Acuity Trading was founded in 2013 and headquartered in London, and has quickly reached the front-runner position in providing trading signals due to the unique combination of the team expertise and technologies used.
In 2017, Acuity formed a strategic partnership with Dow Jones, a leading provider of real-time financial news and information, which allows Acuity to analyse Dow Jones Newswires for sentiment data and to act as resellers of the Dow Jones news and calendar products.
Acuity Trading relies on top-notch Machine Learning and Natural Language Processing technologies in analysing various news sources, including Dow Jones Newswires, on a daily basis, in order to quantify the market sentiment for any given tradable instrument and deliver you the analysis outcome straight on the market instruments charts. Acuity’s AnalysisIQ / Signal Centre Tool utilizes a combination of technical and fundamental analysis, which can be flexibly applied to a wide range of markets - indices, currencies, stocks, commodities.
One of the first brokers that have implemented Acuity’s AnalysisIQ / Signal Centre Tool was world-famous OANDA.
Being regulated by UK’s FCA, a top-tier financial regulator, Acuity is fully transparent, unlike many other signal providers, so you can rest assured that trading signals are compliant-friendly, and there is no manipulation on part of the brokerages offering you the AnalysisIQ / Signal Centre Tool.
You can totally rely on the experts behind the Signal Centre Tool, since they have to stay unbiased and conform to the FCA’s strict regulations and criteria. Signal Centre will never produce a confusing or misleading signal, all the suggestions are equipped by a detailed description of the trading idea.
Ask your broker if they are offering Acuity’s AnalysisIQ / Signal Centre Tool. Note that Signal Centre can be embedded in MT4/5 trading platform as an Expert Advisor (EA).