by Amanda Harvey
Stock trading signals are indications which are usually obtained from price or volume data and signify a point at which a potentially profitable trade may be executed. These signals are often identified by studying chart patterns, but can also come from other forms of technical analysis. Trading signals are a valuable tool, not only for trading stocks, but also for options, commodities, or other securities.
Sources of Stock Trading Signals
Chart patterns are an excellent source of trading signals. There are patterns that can be obtained from charts which indicate the commencement of a trend, the continuation of a trend, the probable ending of a trend, and an imminent reversal. Candlestick charts are particularly popular for studying price movements and identifying patterns, but line and bar charts can also provide a valid method of generating trading signals.
Various types of indicators are also useful in providing signals for entering or exiting a trade. These indicators assess not only price movement, but also volume, momentum, trend direction and strength, levels of support and resistance, and volatility.
Stock trading signals may also be interpreted simply by studying the market. For example, some traders consider a great volume of selling to constitute a ‘buy signal,’ as the probable nearing of a market bottom offers an opportunity to purchase at a low price. A decrease in volume during an upward trend may be taken as a signal to sell, as this drop in volume is often a precursor to a price drop.
Applications of Stock Trading Signals
Whether a trader is using chart patterns, indicators, market observation or a combination of these in order to ascertain trading signals, the primary application of these signals is to determine optimal times at which to enter or exit a trade.
For a trader applying a swing trading approach, the best time to enter a trade is when the price is beginning to move in a certain direction. This trader would then seek to exit the trade just before the price reaches its turning point. Reversal chart patterns can be very helpful in identifying the point at which price direction is likely to change, allowing a trader to exit the trade prior to this happening. Trend indicators such as Moving Averages and Bollinger Bands can also be used to determine the imminence of a trend reversal.
Stock trading signals also provide insight into situations in which a trader might wish to consider either hedging or increasing a position. Hedging involves taking a position, often an option contract, to help offset a possible loss.
At times a trader may decide to apply strategies in which they increase their position; either to try and increase their profit, or to reduce a potential loss. One such strategy is pyramid trading, which involves increasing a position in order to run with a winner. Another strategy is averaging down, and this is done by buying a further amount of shares at a lower price than was originally paid, and as a result, lowering the average paid for each share.
A Final Word on Stock Trading Signals
As with using any form of technical analysis, there is no 100% fail-safe way of using trading signals to be certain that the market will move as anticipated. It is always recommended that a trader use a combination of techniques to ensure the best possibility that their predictions will be accurate. It is also advisable to apply strategies that moderate risk, while maximizing potential gain. This being said, however, signals obtained from using technical analysis can be very effective in indicating probable price movements, which in turn, facilitates successful trades.