A trading signal represents an indicator that encourages a trading operation, be it the purchase or sale of a security or other asset. It is generated as a result of analytical work, which can be performed either by a person or by an automated system.

In the first case, the trader uses various technical indicators to help him interpret market movements and make informed decisions. In the second case, mathematical algorithms are used, based on an analysis of market activity and, possibly, taking into account other macroeconomic factors.

Thus, a trading signal serves as an indicator of a potentially profitable trading opportunity, providing the trader with the information necessary to make a decision to execute a trade.

How a trading signal works

Trading signals serve as indicators of potentially profitable trading opportunities. They are generated based on various disciplines such as technical, fundamental, quantitative analysis, as well as taking into account economic indicators, market sentiment and even signals from other systems.

The purpose of using trading signals is to provide investors and traders with a mechanical, non-emotional method for determining the optimal time to buy or sell assets.

Application of trading signals

In addition to simple buy/sell triggers, trading signals can be used for:

  • Portfolio modifications: for example, timing to increase the share of the technology sector and reduce the share of the consumer goods sector.
  • Asset Allocations: For example, reallocations between stocks, bonds and gold.

Theoretically, trading signals can be as complex as desired. However, in practice, traders prefer to simplify them by using a limited number of inputs.

Example of a trading signal

In the generally accepted understanding, trading signals are associated with quick entry and exit from trading positions. However, there is a category of signals focused on longer-term strategies based on trend reversals and buying stocks on the decline.

Signals for reversal strategies

The effectiveness of such signals is based on identifying periods when the market price does not correspond to the fundamental indicators of the company. An example would be a situation where a market decline is triggered by negative news, but the company’s fundamental indicators demonstrate stable financial health.

Forex signals

The Forex signal system is a collection of various indicators that work in tandem to generate recommendations for buying or selling assets. There are both paid and free signal systems. Traders can also develop them themselves using knowledge and experience.

After the analysis, the system generates a signal that serves as the basis for performing a trading operation. The analysis can be performed manually by the trader, using technical indicators and chart patterns.