Trading signals and indicators are useful tools for traders, as they shed valuable insights into market performance and the best times to buy and sell instruments, helping to ensure maximum returns. However, knowing how to read trading signals is vital for using them effectively, as there are different types of trading signals and indicators which, when used in conjunction with one another, can enable traders to make quick but effective decisions.
Here we cover the basics of trading signals and the different types of trading indicators to help you learn how best to read these in your own trading and investment strategies.
Understanding trading signals
If you read our earlier blog post explaining what trading signals are and how they work, then you’ve had a good introduction. To recap, trading signals are indications for traders to buy or sell a financial instrument at a specific price and time. These signals can be based on technical analysis, fundamental analysis, or a combination of both.
Below are some basics for understanding trading signals that are necessary when learning how to read trading signals:
- Understand the signal’s basis: Is the signal based on technical analysis, fundamental analysis, or both? This will help you understand the logic behind the signal and how much weight to give it.
- Consider the time frame: Is the signal based on a short-term or long-term time frame? This will help you understand the signal’s relevance to your own trading strategy.
- Evaluate the risk/reward ratio: Look at the potential profits and losses that could result from following the signal. Consider whether the potential reward justifies the risk.
- Confirm the signal with your analysis: Don’t blindly follow a signal without doing your own analysis. Use your charting tools and analysis techniques to confirm the signal before making a trade.
- Use stop-loss orders: To limit potential losses, consider using a stop-loss if the signal doesn’t include one to automatically sell a position if it reaches a certain price.
Reading trade indicators
There are also trading indicators which are tools used by traders to analyse the performance of a security and make investment decisions accordingly. There are many different types of indicators, and each one can provide different information about a security’s price movement, volatility, and trend.
Some common types of trading indicators include:
- Moving averages: A moving average is a statistical measure that smooths out price data by creating a single trendline based on a certain number of past data points. There are several types of moving averages, including simple moving averages (SMAs) and exponential moving averages (EMAs).
Moving averages can be used to identify trends and determine whether a security is overbought or oversold. If the angle is upward, the price is moving or was moving upwards, if it is downwards, the price is moving downward and if it is sideways, the price is likely in a range.
- Oscillators: An oscillator is an indicator that fluctuates between two fixed values, often around a zero line. Oscillators can be used to identify overbought and oversold conditions, as well as to identify potential trend reversals. Examples of oscillators include the relative strength index (RSI) and the stochastic oscillator. When the oscillator moves towards the higher value, investors interpret the asset as being overbought, and the opposite applies as well.
- Volume indicators: Volume indicators are used to analyse the amount of trading activity in a security. These indicators can help traders determine whether a trend is supported by strong buying or selling activity. Examples of volume indicators include the on-balance volume (OBV) and the Chaikin money flow (CMF). An increasing OBV indicates favourable volume pressure, which may result in higher prices. On the other hand, declining OBV shows negative volume pressure, which may portend declining pricing.
Traders need to understand how to read and use different indicators in conjunction with each other and with other analysis techniques to make informed investment decisions. It is also important to keep in mind that no single indicator is perfect and that different indicators may provide conflicting signals in different market environments. This is an important factor to keep in mind when learning how to best read trading signals.
How to read One-Signal’s trading signals
One-Signal provides short and concise information in one word in one email a day. Our signals offer information about the future development of the stock market, with long or short notices for each respective trading day. The goal is to guide our subscribers to make a daily investment decision. Alongside our signals, we also provide daily stop-losses for optimal risk management.
In this example, the signal is SHORT, meaning that it is an indication that our reference index will lose in value during the trading day. Subscribers therefore take a short position with the financial instrument of their choice at the New York Stock Exchange opening bell, and close the position at the New York Stock Exchange closing bell, avoiding any overnight exposure.
Our trading signals have proven to be successful over the past 15 years. Since 2010, One-Signal has returned 39.8%, as opposed to its reference index with 10.1%.
It is, however, important to keep in mind that trading signals are not guaranteed to be accurate, and it’s ultimately up to the trader to decide whether to follow them or not based on their reading of the signals. As with any form of investment, it’s important to do your own research and carefully consider the risks before making any trade.
Trading signals provide a wealth of information for traders that they can use to optimise their trading strategies. However, understanding these trading signals is key to reading them effectively and making informed investment decisions. So, how to read and leverage trading signals properly depends on traders knowing how trading signals work. Furthermore, tools like trade indicators and stop-losses can help traders make the best trade decisions, in line with how they read the information trade signals provide.