How to Utilize Trading Signals
When traders want to know if it’s a good time to buy or sell securities, trading signals sends them in the right direction. Trade signals change constantly, and like day trading in particular, require prompt action. The wrong signals, or “alerts,” or misunderstood signals can cost you a great deal of money. The right, lightning fast trading signals can put you in the catbird seat. That’s why it’s crucial to use not only top trading signals, but the types of alerts that suit your trading style.
Utilizing trading signals also depends on individual investment strategies. Contrarian investors might consider a general “sell” signal as a good time to bottom fish for stocks other investors are dumping. When traditional investors flee, that’s a possible market bottom.
Types of Trading Signals
Trading signals are primarily based on technical analysis. Sometimes, a buy or sell signal is triggered by world events or company announcements, but indicators provide the majority of trading signals. On charts, the following include trade signals:
- Bull pennants – any type of pennant signal is considered short-term, but it may last up to a month. The pennant is similar to the triangle pattern, but with higher lows and lower highs. As the name indicates, it’s an upward trend. A price breakout for a pattern occurs when it breaks beyond the triangle, heading toward a preceding trend. In any case, pennants tend to mark halfway points in a security’s move.
- Bear pennants – this pattern appears when a security is heading downward. Pricing follows a steady decline. The trade signal to sell occurs when the price goes beneath the lower pennant trend line, usually on an expansion of volume.
- Head and shoulders patterns – this easily recognized pattern resembles a human right shoulder, head and left shoulder. Think of it as a right shoulder peak, the head a higher peak, and the left shoulder a lowering of the peak. A head and shoulders above the neck line – which is the support level – show a market top. The reverse, or inverse, head and shoulder below the neck line signals the market bottom. Do not trade in either direction until the pattern breaks the neckline. This signal may take a long while to develop.
- Triangles – with triangles, two trend lines converge, whether they are rising, falling or flat. Security prices move within these lines. The triangle pattern itself may descend, ascend or remain symmetrical. The latter will eventually break out to rise or fall. The ascending triangle rises, and the descending triangle falls.
- Rectangles – the security’s price trades within a range in which support and resistance levels are parallel, forming this chart pattern. It also means the price is stalled, but when it breaks out, it will do so in the direction of either range.
- Wedges – these patterns indicate trend reversals within the wedge. Wedges are not short-term patterns, as they may last as much as six months or more. The wedge either rises or falls, with the former generally indicating a downward trend and the latter a more bullish possibility. Yes, with the wedge, rising means downward and falling means upward.
Also known as a trigger line, a signal line consists of a moving average used with an indicator to denote buy or sell signals. Traders look for an indicator moving above the signal line when purchasing securities and sell securities when the signal line moves below the indicator. While various tools are used for generating signal lines, two of best known are the stochastics oscillator and the Moving Average Convergence Divergence (MACD). The former is a basic momentum indicator, comparing the closing price of a particular security over specific time periods. For example, it may take into account the current closing price, and highest and lowest closing prices over a 14 day period. Oscillators measure percentages, on a scale of 0 to 100. These percentages, based on market trading ranges, indicate buy or sell conditions and opportunities.
The MACD compares two types of price moving averages. This involves the Exponential Moving Average (EMA), which is similar to a simple moving average except later data counts more heavily. The most used EMAs are the 12 and 26-day indicators, and the MACD calculates the difference between the 26 and 12 day EMAs. The nine day EMA calculated by the MACD becomes the signal line. When plotted against the MACD, that signal line triggers the buy or sell signals.
Different Schools of Trading Signals
Traders use different schools of thought with particular trading signals. As with any such schools of thoughts, they are based on both trading history and specific goals. For example, with pennant formations, one trader may prefer to enter a trade at the breakout point while placing a stop-loss order just above the opposing trend line. Another trader may enter the trade prior to the breakout point, before it finishes forming. The stop-loss is placed outside the trend line, opposite to where they expect the breakout. Such traders rely on the lower risk of early pennant trading.
Utilizing Trading Signals
If you don’t day trade as a full-time job, your ability to keep track of the markets is limited. Even if you do day trade professionally, you’re still human and may miss an opportunity since the market moves so quickly. Trading signals automatically appear on your charts, as well notifying your phone or email so you’re always on top of your game.
The SureTrader Advantage
At SureTrader, we provide clients with the top technical analysis tools necessary for utilizing trading signals. Our simulator allows you to research these tools, become familiar with them and decide which types of trading signals works best for you. Customize these tools for your needs. With leverage at a 6:1 ratio and competitive commission rates and account fees, we help our clients succeed no matter what type of trading strategy they prefer. That’s just part of the SureTrader advantage.
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