Before the Internet era, the stock exchange traders used hand signals and verbal communication to convey their buying or selling decisions. In today's world of technology, hand signals have been replaced by electronic ones.
What Is a Trading Signal?
It is a trigger for either purchase or sale of a security or another asset, generated by analysis. The analysis can be carried out by either humans or mathematical algorithms based on market action, probably together with other market factors such as economic indicators.
Back in the 17th century, when the first financial exchanges appeared, one had to study a lot to become a professional trader. A stock market analysis made it possible to get ready-made market forecasts. In the 20th century, trading became much more accessible: it was enough to master the basics of trading and to buy a subscription to analytics. However, many wanted to further simplify the process of entering the market. Thus, trading signals appeared that can be used both by beginners and experienced stock brokers.
How Trading Signals Work
The essence of TSs is as follows: subscribers receive hints from programs or service providers. These hints contain information about the most favorable time for the sale or purchase of a particular currency pair, placing a stop loss, opening/closing a position, etc. A time-consuming analysis is no longer required - the subscriber just needs to open an order with the necessary parameters according to the received hint. Some types of online trading signals allow you to enter the market automatically.
To subscribe to TSs online, contact a broker that delivers the transaction copying services (copy trading). This will allow you to subscribe directly to the signals of traders whose trading accounts are opened with those brokers.
Types of Trading Signals
There are two basic types: manual and automatic.
Manual signals are received by the subscriber per e-mail, via SMS, through messengers, or directly at the trading platform. The main disadvantage here is the bit time interval between the receipt of information from the supplier and the opening of the order. A forced pause can lead to losses because the price may be completely different from the one at the signal entry point. This method creates a number of difficulties when trading market orders. The advantage of manual signals is the ability to ignore them in case of disagreement with the predictions.
Automatic signals are very popular because of their convenience. The subscriber has to set specific parameters such as the volume of orders only once, and all further actions on the exchange will be performed for them automatically. It means that if the signal provider opens an order, exactly the same order will be opened on the subscriber's account.
How It Works
Trading signals have several functions. Its main function is to trigger sales and purchases. However, a signal can also be used to diversify a portfolio by defining if it is a favorable time to buy more in one specific sector and less in another one. It can also help with asset class allocation such as shifting the funds among commodities, bonds, and stocks.
Trading signals use a variety of inputs from several disciplines, such as technical, fundamental, graphical, and quantitative analysis. The key goal is to give investors and traders a mechanical method to buy or sell securities or other assets.
The most common trading signal inputs are:
The breakout or breakdown of a technical pattern such as rectangles, triangles, head-and-shoulders, and trendlines.
Interest rates. Changes in interest rates can often assume changes in the commodity and stock markets.
Moving the average cross. Most investors monitor the 50- and 200-day moving averages but there are also other patterns. The input could be when trading activity crosses above or below the average or when two averages cross each other.
Market sentiment. Extreme bullishness according to surveys or actual trading activity can predict market tops whereas excessive bearishness can result in market bottoms.
Valuation. An unusually high valuation compared to the market, sector, or stock specific measures can trigger the sale of signals.
Volatility. There are many ways to measure volatility, and as with other indicators, extremely high or low volatility can result in market changes.
Volume surge. Excessively high volumes often precede a new move in the market.
Technical analysis is based on the assumption that future price movements can be predicted from the past behavior of this price. The main tool of technical analysis is the quote charts for previous time intervals.
The key points of are:
The price matters. Price fluctuations consider absolutely all factors - economic, political, natural disasters, catastrophes, wars, elections, etc.
The price moves not randomly, but following certain trends.
History tends to repeat. By studying the price movements in the past it is possible to predict its movements in the future. This is because the reaction of market participants to future events will be the same as it was in the past.
Graphical analysis is a part of technical analysis. It helps traders to see the graphical patterns of price movements. Graphical models determine the direction of the exchange rate movement.
Fundamental analysis evaluates the macroeconomic indicators of countries that include, in addition to general economic factors, the political, social, and financial ones. Even natural disasters and environmental disasters are part of the fundamental analysis.
FA considers a huge number of factors that may affect the overall economic situation of the state and the national currency. It is quite difficult to conduct a qualitative fundamental analysis because various factors can have opposite effects at the same time.
Trading signals help traders to decide whether it is time to buy or sell a security or asset. It is typically a software program that gives automatic hints on current market trends. Trading signals are based on a variety of analytical models, such as technical, fundamental, graphical, quantitative, etc.