What Is a Trading Signal?

The name should be self-explanatory here. It is a signal that tell you how you should be trading. Just like a traffic signal tells you to stop or move, a trading signal tells you to take one of the two positions. You can either buy a particular asset or sell it when you are trading. A trading signal tells the trader whether to go long or short in a trade i.e. buy or sell an asset. However, a signal is only a signal. It is not a revelation or commandment from God. You can still take the decision that you think makes more sense. A trading signal is there only as a guide, not as a guaranty.

When you sign up with online brokers, you will notice them giving you access to the trading signals. It is important to know here that some brokers will give you access to free signals while others will charge you for this service. It is a common notion that the free trading signals are less reliable than the paid ones. While opening an account with an online broker, you can decide how you want to receive the signals. They can come to you in an email or SMS. You have to pick the method suits you the most. The idea is to be able to see the signals instantly so you can enter a trade immediately.

You can’t trust a trading signal that came to you today for a trade you enter day after tomorrow. Your broker will give you the options so you can pick whether you want to receive emails or SMS with signals.

How Trading Signals Are Created

The next most important question is to know how these signals are created in the first place. You have to know that there are many entities who can create trading signals. It could be an experienced trader in the market selling signals to the new traders. It could be a broker selling its own trading signals. Or it could be a third-party company that claims to have many experienced traders helping it generate the trading signals. There are two ways for people to create trading signals. They can either generate them based on the past data or by analyzing the ongoing conditions.

An experienced trader can look at the past pricing information, trends, events, etc. and them use some technical analysis technique to come up with a trading signal. At the same time, trading signals can be generated by looking at the current affairs and events, and predicting whether to go long or short on a trade. You can’t really tell which ones are more reliable. However, you have to know that there are two ways to generate these signals. They can either be generated by a human or with the use of some software. There are pros and cons associated with both methods.

So, the signals coming from you could be an experienced trader doing all the calculations and technical analysis, and then generating the signals. Alternatively, a company might be using a software tool in which certain commands and filters have already been fed. Based on these filters and commands, the software produces trading signals instantly. As stated earlier, you can’t call one superior to the other because there are pros and cons associated with both of them. When it comes to a human trader doing the calculations in real time, you have two issues: the trader might have made some mistake and there could be some emotional involvement in the generation of the signals.

When it comes to software-generated trading signals, you don’t have any human and emotional involvement in the trading signals. They are created with strict rules and filters that have been set in place by experienced traders. Now, the downside to the software-generated signals is that absolutely no involvement of emotions can be disadvantageous at times. If the trading signals are being generated based on ongoing events, human involvement is important. Software can do a better job when the analytical work is being done on tons of data from the past.

Blind Trust Is Bad

It has been stated in the earlier passages that trading signals are only your guides, not guaranties. You can’t rely on them 100% of the times. In fact, the best approach to using trading signals is to involve some of your own analyses as well. Sometimes, you might find your conclusions conflicting with what the trading signals are trading. At the same time, you should also be careful about who you pick for your trading signals. Go with only the industry-trusted options. If you have to pay a few dollars for the service, you should not hesitate from doing that if you believe the signals are trustable.

Bottom Line

It is imperative to pay attention to who you are receiving the signals from. You can only trust the free signals so much. Usually, the paid trading signals are the more reliable ones. However, you should keep recording the performance of your signals at all times. Do the math at the end of the month to see the success or failure rate of your trading signals. If you think they have been reliable for the most part, you can continue to receive them. Last but not least, do not close your analytical and observant eyes to the market trends. No trading signals should be trusted 100% of the times ever.