Trade Signals: What They Are and How to Use Them

What Are Trade Signals

A signal is the information indicating what action should be made: buying some asset at a certain price, setting stop loss and take profit targets. Signals are generated by the market analysis performed either manually by a trader or by special software which analyzes hundreds of thousands of data in a split second.

But a signal doesn't guarantee a profit per se. It is just an organized opinion based on the methodology which was used in creating it. The quality of this opinion is determined entirely by the quality of analysis and the environment it was made in.

How Trade Signals Are Generated: Manual vs Automated

Manual trade signals are generated by professional traders analyzing charts and offering their opinion. They're more time-consuming but can include qualitative indicators that are unavailable for algorithms like unusual flow of news or changing of market sentiment.

Automated signals are generated by an algorithm looking for predefined patterns among hundreds of market parameters. Once the pattern is found, the signal appears immediately. The main advantages of automation are speed and consistency. Its downside is that algorithms see only figures, not the story behind them.

What Are Trading Bots and How Do They Relate to Signals

Trading bot is a step further than a simple signal generator. Not only it tells you what to do but also does all the work for you: places the order, sets the limits of losses and gains and manages your position according to the set of rules.

That difference is crucial. A signal always requires making a choice, while a bot makes a trade automatically. But bots require much more extensive testing since the consequences of a wrong rule set are immediate.

Types of Trade Signals by Timeframe

• Short term signals are meant for trades that last minutes to hours. They are usually found on 1-15 minute charts and are most applicable for scalpers and day traders.

• Medium term signals target trades with several days to a couple of weeks duration. They are drawn on 1 hour - daily charts and are most suitable for swing traders.

• Long term signals target trades with weeks to months duration. They are based on daily and weekly charts and are mostly connected with position trading or investing.

Depending on the timeframe of a signal it is possible to determine the type of trader that it is meant for. Short term signals are of no use to swing traders and long-term signals are meaningless for scalpers. Reading and understanding how to trade signals begins with establishing the connection between the signal and your trading timeframe.

What is Trade Signals Telling You: Entry, Stop Loss, and Take Profit

Any well-composed signal must include at least four pieces of information:

• Asset to trade (like EUR/USD, BTC/USD, gold)

• Direction (Buy or Sell)

• Entry level/entry condition (Like "buy at 1.0750" or "buy at the break above 1.0800")

• Stop loss and Take Profit levels (that define risks and rewards of the trade)

Signals without a stop loss must be treated with maximum suspicion. Direction without exit criteria is just a guess. How to read crypto trade signals, must begin with verification that all four criteria are present.

How Pocket Option Signals and Bots Can Support Your Market Analysis

On Pocket Option there is an inbuilt signal feature. Signals are provided by the in-built algorithms of the platform and indicate setups that are happening in real-time right on your chart. Those who wonder how to trade forex with signals, must be aware that this feature works differently on different trading modes.

Pocket Option Forex trading requires third party trading signals from trading bots or other traders via MetaTrader platform. Pocket Option Quick Trading signals can be copied in one click in the right side panel.

Use signals as an aid to your personal analysis, but don't treat them as a substitute for it. A signal that coincides with your own analysis and reading of the chart is more trustworthy than a signal contradicting it.

How to Evaluate Whether a Signal Is Reliable

• History of performance: has the signal source published its audited history of performance? All statements that lack proof of performance history must be dismissed.

• Consistency: does the performance of the signal provider correspond to its previous statements, or is there a lot of deviation?

• Transparency: is the mechanism of generating the signal clear? Unexplainable signals are undervaluable.

• Risk parameters: are the risk parameters of all signals – the stop loss and take profit – defined?

Combining Signals With Your Own Analysis

The optimal way to verify a signal is selective confirmation. When receiving a signal, analyze the chart. Is the setup reasonable? Is the entry at the right level? Is the trend in agreement with the direction of the signal? In case the answers to these questions are positive, the signal is confirmed with your own analysis. Otherwise, ignore the signal.

This double layer of verification separates those who make money on signals from those who follow them without questioning. The decision making process must never shift from the trader to the computer.

Risk Management When Trading With Signals

• Trade using no more than 1 to 2% of the total amount of account capital per signal trade, regardless of how confident you are about the signal.

• Use the stop loss suggested by the signal, or set up your own if the stop of the signal is too wide according to your risk management rules.

• Set the limit of signal trades per day and per week. In case you have lost on 5 consecutive signals, this might be due to the conditions of the market, not to poor quality of the signal. In this case, suspend trading with the signals.

• Test every new source of signals for at least 2 weeks in demo mode.

Common Mistakes When Using Trade Signals

• Blindly following signals without looking at the chart and checking the trade logic.

• Taking signals from non-audited sources without a track record of performance.

• Disregarding the stop loss suggested in the signal since "this trade looks like it will work out."

• Relying too much on signals and not developing your analytical skills, thus becoming eternally dependent on an external source.

• Treating signals as guarantees. Even the best signal providers experience losing streaks. Signal is not a guarantee, it is a probability.

Conclusion

So what is trade signals? They are structured ideas, generated by means of analysis and indicating opportunities to start trading. They are not directives. They are not promises. They are instruments, and as such, they completely depend on the way you are going to use them.

Signals on Pocket Option can assist you in your trading process. Check every signal with your chart. Observe your risk management rules. Start practicing in a demo account before you invest actual money in trading. Every trade remains your own responsibility, regardless of where the idea came from.

Disclaimer: The information here reflects general market education and not personalised advice. Any trading decisions you make are your own responsibility. Consider consulting a licensed financial professional if you are unsure.