How to Use Trading Signals The Definitive Guide to Success

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How to use Trading Signals

Do you use trading signals?

Are you currently struggling to generate returns from these signals? This is something that many traders are currently experiencing.

However, is this because of the trading signals that are being followed or is it the trader that is not making the right decisions and does not know how to use trading signals?

When it comes to Binary and Forex trading, signals are a tool and should not be a crutch.

From that perspective, a trader should have a strategy when using signals just as they do for their other trading endeavours.

It is not just a matter of turning on the signal provider and then blindly following the signals and placing the trades.

The trader has to know what trade limits to implement, what entry levels are best as well the best stop losses to put in place.

In this short overview, we will run over some of the most important indicators which drive signal software and how to use them effectively to make the most profit.

The Parabolic SAR

One of the best known signals that one can use is the Parabolic SAR. This is also known as the Parabolic Stop and Reserve. It is a combination of a price and time based technical analysis signal.

The Parabolic SAR was developed by Welles Wilder in 1978. The Parabolic SAR is used to trail prices with the trend that it is following. Given that it is trailing, the indicator will be below prices when there are falling and it will be above prices when there are rising. We have an example of the Parabolic SAR in the chart of the New Zealand dollar to the right.

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Generally, when the prices are above the Parabolic SAR indicator then the trader will enter a long position and buy the currency. On the flip side, if prices are below the indicator then the trader will sell or go short the currency.

However, the real significance for traders from the Parabolic SAR is allowing the trader to place stop losses. Essentially the trader will use the indicator to place his / her automatic stop levels. Once the price has broken past the Parabolic SAR, this is an indicator that it has broken a trend and is possibly in line for a reversal.

What automated signal software will do is try to generate a signal based on whether the Parabolic SAR is indicating that the trend is reversing its current levels. If the software detects that the price is breaking away from an uptrend then it will issue a sell signal. The converse is of course true for a price that goes above the parabolic SAR.

Of course, using Parabolic SAR signals can be effective but you need to make sure that you are using some precautionary methods before entering the trades. These include some of the following.

  • When entering the trade, your buy and sell should be the averages of the lowest and highest prices for the previous 4 candles.
  • Do not trade more than at least 4% of your account size on any signal position
  • If you are trading Forex, set adequate stop loss limits that are on the level of your parabolic SAR indicators
  • When you decide to enter the trade with a Parabolic SAR indicator, you should make that decision based on where the current price is in relation to the indicator

Moving Average Indicators

This is one of the oldest and most important technical indicators. The moving average indicator is an extremely effective way for the trader to monitor the trend of the asset. There are two types of moving averages that trading signal providers use when generating signals.

The first is the Simple Moving Average (SMA). This is essentially calculated as the average of the last x periods where “x” is the time period under consideration. Many traders combine an SMA indicator with different time periods to get the best indicator of trend.
We can see in the example to the right a strong uptrend on the price of Bitcoin with three different moving average indicators.

Another moving average indicator is the Exponential Moving Average. This is quite similar to the SMA with the only exception being that the weighted version places more emphasis on the most recent price levels. Essentially, higher weight is place on these levels in the calculation of the moving average. This can be beneficial to the trader as it allows him / her to make the most informed decision when the markets are moving quickly.

Moving averages are lagging indicators. This means that they are as a result of events that have already taken place and are not necessarily predictive. However, where the moving average indicators is most useful is in establishing the strength of a market trend.

It is helpful for the trader to spot the trends through all of the market noise. In a similar fashion to the Parabolic SAR, the Moving Average can also point to potential reversals in the trend. A signal provider will also look at the moving averages to produce the signals. They will usually use an algorithm that looks at two or three different moving averages.

The algorithm will then set predefined rules on what signal to provide based on the levels of all of the moving average lines. If you are going to be following the signals of a provider based on the moving average indicator, you need to take the following risk management steps.

  • Commit only a pre-defined trade size when entering. This should be no more than 4%.
  • Trading decisions should always be based on the positions of a number of moving average indicators with varying time parameters
  • Set buy and sell points that are the average of the previous 4 candle sticks

Moving Average Convergence Divergence (MACD)

The MACD indicator is an extension of the moving average indicators that we talked about previously. The MACD indicator uses two different EMA indicators as the input into its formula. Unlike moving averages only, the MACD is an indicator of when to buy and sell a particular currency pair.

The MACD is calculated by subtracting the 12 day EMA from the 26 day EMA. Further, a 9 day EMA line is used and is termed the “signal line”. These two lines are plotted together and the 9 day moving average is used as the indicator of whether to buy or sell. In the graph on the right, we have the price of the Japanese Yen and the corresponding MACD chart and signal line.

As a general rule of thumb, when the MACD indicator is below the signal line then this could be an indicator to sell the pair and the opposite can be said when the indicator is above the signal line.

Conversely, when the signal line diverges from the MACD then the trend that was in place can be considered over and traders should take caution. Traders should also be aware of strong upward moves in the MACD as this could be an indicator that the currency pair has been overbought and the 12 day moving average is increasing substantially compared to the 26 day one.

Algorithmic trading software also uses the same logic when producing trading signals for traders who subscribe to the signals. The software will monitor the levels of the MACD and the signal line and generally adjust the signals being generated based on historical volatility. If the uptick in the MACD is within previous standard deviations then overbought signals will not necessarily be issued.

When making use of MACD trading signals, keep these in mind before entering your trades.

  • As always, have a set maximum that you are willing to invest as a percentage of your total capital balance.
  • Entry decisions should be based on how far the signal line is from the MACD indicator. This should also take into account how volatile the indicators have been in the past in relation to the current observed movement.
  • Entry and Exit levels should be based on the observed prices over the past 4 candles.
  • If trading Forex on margin, you should have adequate stop losses in place that are well placed to obtain the desired return on the upside but also won’t allow for too much drawdown if a reversal were to occur.

Bollinger Bands

Developed by John Bollinger, Bollinger bands are another technical indicator that goes all the way back to the 1980s. Bollinger bands are similar indicators to those of the Moving averages with an important addition, that of volatility.

This is very important as volatility on the price is a key indicator of whether the trend or possible reversal that you are witnessing is temporary and within reasonable bounds or a more permanent trend change.

Bollinger bands are usually plotted as three lines. There is the middle Bollinger band which is usually a moving average over a specific time period. Then, once the middle Bollinger band has been plotted, two additional lines are drawn which are the upper and lower bands. These are the middle band plus or minus the standard deviation. In the image on the right, we have the 20 period Bollinger bands plotted with 2 standard deviations.

The trader can choose how many standard deviations from the trend they would like to examine for the pair. Taking a look at a quick example, in the graph on the right we have the EURUSD Bollinger bands with a 20 look back period and 2 standard deviations either side of the trend.

The way that traders are able to produce signals based on the Bollinger band is to determine how far away from the trend the price has broken and whether that is reason to enter a trade based on possible reversals.

As a general example, assume that the price had broken above the middle band and had touched the top band. Many traders and algorithms see this top band as a resistance level. Hence, if the price is unable to breach this upper band, it is likely to retrace and is a sign the trader should short. Of course, the opposite can be said for a fall to touch the lower Bollinger band as a resistance and a possible entry for a long position.

On the other hand, if the price manages to break past the upper or lower Bollinger bands then this could be an indicator of a trend reversal and a signal that the trader should enter the position that conforms with the trend. This is just one example of how trading software will use Bollinger bands to derive their signals.

If you are deciding to use Bollinger Band signals to drive your trading, then you would need to take the following precautions before entering trades.

  • Never allocate more to a Bollinger Band signal trade than a set amount. This can vary according to the parameters set by the trading software that produces the signal.
  • Entry decisions should be based on the choice of standard deviation on the signal. Some signal providers allow you to define the number of standard deviations from the mean you would like signals to be generated on.
  • As with the other indicators, entry and exit levels should be based on the prices that were observed over the previous four candles.
  • Stop losses are key when it comes to Bollinger band signal trading. The Bollinger bands themselves are also quite helpful when placing stop losses. Usually, one can plot multiple bands and place a number of stops

A Comprehensive Strategy

Of course, the above signal types are only the tip of the spear when it comes to the number of trading signals a trader can use. Similarly, the manner in which the signals are produced using these indicators is much more involved than what has been described. Computer algorithms are able to incorporate a number of different variants of the same indicators and make use of advanced machine learning technology to adapt these algorithms to change.

If you want get the most out of your trading then you should join the Trading Club and make use of our extensive range of trading educational material as well as connections to online trading courses which could super charge your trading returns.

Article Summary:

Trend trading with Ichimoku need not be confusing because the name is unfamiliar. Many traders prefer to trade with Ichimoku once they learn to see the trend in a new way with Ichimoku. This article is a complete breakdown of the components of the indicator as well as how you can turn this indicator into a trend following system.

Patience is a high virtue.

Many traders are asked what indicator they would wish to never do without. My answer has never wavered as there is one indicator that clearly illustrates the current trend, helps you time entries, displays support and resistance, clarifies momentum, and shows you when a trend has likely reversed. That indicator is Ichimoku Kinko Hyo or more casually known as Ichimoku.

Learn Forex: After a Quick Lesson, Ichimoku Clearly Displays Trading Opportunities

Chart Created by Tyler Yell, CMT

Ichimoku is a technical or chart indicator that is also a trend trading system in and of itself. The creator of the indicator, Goichi Hosada, introduced Ichimoku as a “one glance” indicator so that in a few seconds you are able to determine whether a tradable trend is present or if you should wait for a better set-up on a specific pair.

Before we break down the components of the indicator in a clear and relatable manner, there are a few helpful things to understand. Ichimoku can be used in both rising and falling markets and can be used in all time frames for any liquid trading instrument. The only time to not use Ichimoku is when no clear trend is present.

Meet the 5 Members of the Ichimoku Family

Always Start With the Cloud

The cloud is composed of two dynamic lines that are meant to serve multiple functions. However, the primary purpose of the cloud is to help you identify the trend of current price in relation to past price action. Given that protecting your capital is the main battle every trader must face, the cloud helps you to place stops and recognize when you should be bullish or bearish. Many traders will focus on candlesticks or price action analysis around the cloud to see if a decisive reversal or continuation pattern is taking shape.

Learn Forex: The Cloud Alone Can Help Provide Direction

Chart Created by Tyler Yell, CMT

In the simplest terms, traders who utilize Ichimoku should look for buying entries when price is above the cloud. When price is below the cloud, traders should be looking for temporary corrections higher to enter a sell order in the direction of the trend. The cloud is the cornerstone of all Ichimoku analysis and as such it is the most vital aspect to the indicator.

Time Entries with the Trigger & Base Line

Once you have built a bias of whether to look for buy or sell signals with the cloud, you can then turn to the two unique moving averages provided by Ichimoku. The fast moving average is a 9 period moving average and the slow moving average is a 26 period moving average by default. What is unique about these moving averages is that unlike their western counterparts, the calculation is built on mid-prices as opposed to closing prices. I often refer to the fast moving average as the trigger line and the slow moving average as the base line.

Learn Forex: Look for the Trigger Crossing the Base In Favor of the Trend

Chart Created by Tyler Yell, CMT

The Ichimoku components are introduced in a specific order because that is how you should analyze or trade the market. Once you’ve confirmed the trend by recognizing price as being below or above the cloud, you can move to the moving averages. If price is above the cloud and the trigger crosses above the base line you have the makings of a buy signal. If price is below the cloud and the trigger crosses below the base line you have the makings of a sell signal.

Confirm Entries with the Mysterious Lagging Line

In addition to the mystery of the cloud, the lagging line often confuses traders. This shouldn’t be the case as it’s a very simple line that is the close of the current candle pushed back 26 periods. When studying Ichimoku, I found that this line was considered by most traditional Japanese traders who utilize mainly Ichimoku as one of the most important components of the indicator.

Learn Forex: The Lagging Line Displays Momentum of the Move

Chart Created by Tyler Yell, CMT

Once price has broken above or below the cloud and the trigger line is crossing the base line with the trend, you can look to the lagging line as confirmation. The lagging line can best confirm the trade by breaking either above the cloud in a new uptrend or below the cloud in a developing downtrend. Looking above, you can see that the trend often gathers steam nicely after the lagging line breaks through the cloud. Another benefit of using the lagging line as a confirmation indicator is that the lagging line can build patience and discipline in your trading because you won’t be chasing the initial thrust but rather waiting for the correction to play out before entering in the direction of the overall trend.

Trading With Ichimoku Checklist

Now that you know the components of Ichimoku here is a checklist that you can print off or use to keep the main components of this dynamic trend following system:

Ichimoku Checklist:

1.Where is Price in Relation to the Cloud?

  • Above the cloud -filtered for buy only signals
  • In the Cloud – be cautious but ready to jump in on the prior trend or finesse a current position. watch the candle stick formations heavily
  • Below the cloud – filtered for short only trades

2. Is price consistently on one side of the cloud or is price whipping around on both sides consistently?

  • Ichimoku is best used with clear trends and should be set aside during ranging markets.

3. Which level of the Ichimoku would like to use to place your stop?

  • If you use Ichimoku to place stops as well, you can either use the cloud or the base line.

Ichimoku is a stand-alone trading system. Unlike most indicators, Ichimoku can be used on multiple time frames. Read page 6 of our Ichimoku Trading Guide to learn how incorporate this unique indicator into your trading strategy, whether you’re a day or swing trader.

Happy Trading!

–Written by Tyler Yell, Trading Instructor

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

How to Choose the Best Forex Signals App

Forex trading signals apps are ever increasing in popularity. However, it’s vital to team up with an outstanding team of traders and analysts to provide you with the best forex signals possible. This guide will help you choose the best forex signals app (adn forex signals provider) to drive your investment forward and upward!

When Choosing the Best Forex Signals App, Look for the Following:

Consistent Profits

The best forex signals provider should obviously be able to produce good, consistent trading results. To achieve this is no easy task and requires true professionalism by a team of expert analysts. These individuals need to know the markets like the back of their hand and should be able to adapt to ever-changing market conditions. To provide daily forex signals of the highest quality requires a persistent, focused effort and should only be performed by seasoned market professionals.

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An outstanding forex signals provider knows how to adapt to any market condition.

Limited Drawdown

A highly successful forex signals app will not only yield exceptional performance in terms of equity growth but will accomplish this with negligible drawdowns. This means that the signals app will issue few consecutive losing trades, creating a steady equity growth curve. Of course, the size of the winning and losing trades also matter and not the quantity only.

Sufficient Frequency of Trading Signals

When searching for the best forex signals on the market, traders need to look for a forex signals app that issues trading signals on a frequent basis.

Why does this matter? Well, an excellent trading signals strategy with a win rate of, for example, 65%, may perform better or worse than its long-term average when only a few trades are executed. For instance, when only three trades are placed, there is a reasonable chance that all three may lose (or win). However, when 1000 trades have been opened and closed using this signals strategy, the win rate will most probably be relatively close to the long-term average of 65%.

So, with a forex signals app that issues good trade alerts on a frequent basis, traders will experience the consistent results of a ‘large sample size’ much sooner than with a signals provider who issues trading signals irregularly.

Another benefit of using frequently provided forex signals is that if you perhaps miss one or two signals, you won’t have to wait too long for the next one to appear. This will help you to achieve consistency with your trading.

Trading signals should be released frequently enough.

A Robust Track Record

Before using just any forex signals app, traders need to make sure it has a good track record. FX Leaders has been providing some of the best forex signals in the industry since 2020. Every year has yielded thousands of pips.

Instrument Diversification

A forex signals app that provides signals on a variety of financial instruments may increase your level of diversification. FX Leaders provides phenomenal trading signals on currency pairs as well as commodities, cryptocurrencies, and stock indices, giving you confident access to a variety of financial instruments across different asset classes. To find a reliable forex broker who offers all of these instruments, simply follow this link.

More About the FX Leaders Forex Signals App

FX Leaders goes to great lengths to provide the best forex signals possible. The analysts in our forex signals department are seasoned market professionals with abundant trading experience. The combination of our analysts’ expertise with our easy-to-use signals interface is what makes our forex signals app brilliant. Not to mention the variety of financial instruments covered by these trading stars.

The FX Leaders trading signals terminal is really easy to use.

Through the years, FX Leaders has provided consistently profitable forex signals with limited drawdown periods. The frequency of our trading signals is really good with an average of more than two signals per day.

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