What is the best Forex signal? Many traders wonder about this whether they are new to trading or whether they have traded Forex for a period of time. I have some ideas of what I think makes the best Forex signal.

The signal should be objective, the signal should be clear, the signal should indicate the direction of the trade, the signal should have a target, and the signal should have clear statistical data that shows the results of the signal over time.

Here is a summary of the definition of an objective signal from David Aronson’s book, Evidence-Based Technical Analysis:

1. the method must be programmable

2. It must be implementable in a computer program

3. It must provided unambiguous market positions (long, short, or neutral).

4. If they do not follow this criteria they are “by default subjective.”

That seems like a pretty easy method to test as to whether a trading signal is objective or not. Any other kind of signal is subjective and left up to interpretation by whoever is looking at and analyzing it. This would be true of a whole host of trading signals according to Aronson, “Classic chart pattern analysis, hand drawn trend lines, Elliott Wave Principle, Gann Patterns, Magic T’s, and numerous other subjective methods fall into this category. Subjective TA is religion – it is based on faith. No amount of cherry-picked examples showing where the method succeeded can cure this deficiency.”

Now anyone trading these methods, and I include Fibonacci analysis, may not agree or become defensive but most traders if they think about it realize the arbitrary and subjective decision-making and analysis that goes into this kind of trading signal.

Next the signal should be very clear. A divergence for example is clear. When a divergence is created it is created from two distinct points on a momentum oscillator, for example, and price. Regardless of the time frame the trader is trading, when the bar closes, if a divergence has formed it can be seen and identified. A trader in India and a trader in Japan will see the exact same signal provided they are looking at perhaps a 14 period RSI, Relative Strength Index. At the close of the bar, you have a divergence, or you don’t. This would be true of any truly objective trading signal.

The signal should also give a direction to the trade. For example, a negative or bearish divergence in most traders mind would signal that price should be dropping. This of course, is the standard analysis of divergence and is incorrect but from a purely “standard” method of trading, the signal gives direction. Actually a divergence is most often a signal indicting retracement. Another RSI signal which is much more profitable is the RSI Reversal. This signal also complies with all of the above criteria and it indicates that the trend is ready to continue its direction again and a precise and objective point.

The last two criteria must be included in a discussion of signal because without them there is no measurement. The signal at the time it occurs should have a target. The target should be measurable in terms of pips. If the signal is objective and the target is measurable, than statistical data can be gathered and analyzed in Excel and by other methods in order to determine the viability of the trading signal.

In this short discussion one should be able to see that all of these things need to be in place for the trader to become successful and most importantly profitable.