Speculative investments in equities and foreign currencies commonly use ‘signals’ deduced through various methods to time entry or exit actions.The exchange rates, if mapped on a chart according to different parameters, show definite trends.
The purpose of these forex trading signals are to (i) find entry points quickly (ii) perfectly time exit signals to obtain highest possible profits, and (iii) rule out false signals.
These trends may be general upswings, general downswings, or turnarounds from one to the other. The perfect situation would be if you could buy or sell at the perfect troughs or peaks, respectively.
To complicate matters a bit, if you map the figures for a considerable period of time, you will find that even in a general swing (up or down) over a long period, there are small cyclical swings in the short run, even in a day for example. Again, sometimes you will find arbitrary happenings trigger temporary deviations in the trend, which may falsely be read as forex trading signals, resulting in a wrong decision.
The expert analyst always confirms a signal deduced from several tools with more sophisticated tools or different parameters in the same arrangement to confirm a signal. For example, if you are charting 5 EMA and 10 EMA, the crossover of these lines usually signals a trend reversal and thus a good entry or exit. When you spot such a trend, you may use 20 EMA, too. When the 5 EMA line crosses the 20 EMA, too, it is time for action.
When you are starting off for the first time (after you have had enough practice on paper simulation), use very simple strategies as these are easy to follow and strengthen your fundamental knowledge. Advance strategies are only refined forms of the simpler ones, so it helps both ways to begin with the easy forex trading signals.
One easy method is to plot the 5 EMA and 10 EMA (or any other combination) for your currency pair. Plotting the values on a chart will clearly show a trend, and the points of action are when the lines cross over. Some experts advocate double checking the trend with a third line (say, the 20 EMA; wait for the price bar to close on the opposite side of the 20 EMA)) to confirm that it is not a false s forex trading signal.
Another strategy could be to visually check the signal from the indicator and enter on the close of a signal bar. Although plotting moving averages sometimes tend to ‘uncross’ after a crossover, and Stochastic lines may intersect several times before reflecting a definite trend (giving a false signal), some analysts recommend using your favorite EMA analysis to confirm signals.
Parabolic SAR is another tool found very easy in setting trade signals. Plot the values in any time frame (0.2, 0.2), ADX 50 (+DI, -DI lines). Here, experts recommend entry (buy) when + DI line is above –DI line. Sell when +DI line is below the -DI line.
Some experts say that the Parabolic SAR often retraces (80–90% of the time) after the initial dot appearance, and recommend that traders use tools such as Fibonacci retracement or Fractals to touch a definite mark to effectively time the retracement.
Likewise, the more you research, the more refinement you will get of similar basic principles which plot trends and forex trading signals. With expertise, you will be able to devise your own set of combinations which best fulfill your requirements.