Reading a trading signal before you follow it

A signal fits in a few lines: a market, a direction, an entry price, a stop and a target. What matters is what those lines say about the risk you agree to take.

The five fields of a signal

1. The market: the currency pair, index or commodity involved.
2. The direction: buy if the trader expects a rise, sell if they expect a fall.
3. The entry price: the level at which the position opens.
4. The stop loss: the level at which the loss is cut, no questions asked.
5. The target: the level at which the gain is taken.

Reward against risk

Divide the distance from entry to target by the distance from entry to stop. A ratio of 2 to 1 means a winning signal earns twice what a losing one costs.

A good signal is not one that wins. It is one whose maximum loss you knew before you entered.

Read on with our piece on the stop loss.