What Are Trading Signals and Should You Rely on Them?

Is it time to buy or sell that stock? Many investors sit on their hands and wonder whether it is time to pick up shares or ditch them on the open market. This question could be answered by relying on trading signals, a financial tool that sends indicators to traders of what positions to take based on an analysis of all the available data and sources.

Types of Trading Signals

Technical

The world of trading possesses various technical signals that can allow traders to make the most informed decisions for their investment endeavors. These can consist of a broad array of indicators:

• Moving Average (MA) Determine the direction of a present price trend without the noise of short-term movements.
• Stochastic Oscillator Compare an instrument's closing price to a range of prices over time, learning about the momentum and trend strength.
• Relative Strength Index (RSI) Identify market conditions, warning signals, and momentum. The RSI ranges between 0 and 100. Anything below 30 suggests the stock is oversold. Anything above 70 shows the instrument is overbought.

» Here are the DAX 30 trading signals explained

Fundamental

Fundamental signals are just as important and easier to gather and understand, relying on various components:

• Economic news Every day, investors comb through the news to find out if anything is impacting the economy, such as the central bank raising interest rates, an explosion in Africa that will decimate crude oil production, or the federal government imposing a new tax. These things will inevitably impact the financial markets.
• Earnings reports Earnings season is a big time for the financial markets. Earnings reports not only provide results of what transpired in the last quarter, but companies also offer guidance on what could be expected in the next quarter or the coming year.

While these are all reliable trading indicators, different traders have different needs and maintain unique trading strategies. So, while economic news might not affect one particular trade, the latest developments might impact another trading strategy.

» Do you know: what is cash and carry trade?

Reliability of Trading Signals

Should you depend on trading signals? Suffice it to say, that they are useful for every trader, but they are not foolproof. Like every investment and trading strategy, there are risks that you need to be prepared for at all times. Trading signals' accuracy can sometimes vary on the market conditions, the data source, and breaking developments.

In the end, you should be ready for anything to happen and only trade what you can afford to lose.