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I understand that a trade signal is something that basically tells you to buy/ sell something after doing some analysis but what exactly is it?

Would it be a figure that one would calculate?

What is it exactly?

Could you walk me through a simple yet realistic example please?

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As an example, a simple trading system indicator is a moving average crossover. A buy signal occurs when the shorter (faster) moving average crosses above the longer (slower) moving average. A sell signal occurs when the shorter moving average crosses below the longer moving average (a popular combination is a 50-day and a 200 day moving average pairing).

Shorter moving average systems are more timely, generate more trade signals and have more false signals than systems with longer moving averages. Longer term pairings will have fewer false signals but will be late in and late out.

A system like this works well in a trend but poorly when in a trading range. Don't get excited by the prospect of this or almost any other technical analysis indicator. They predict nothing.

  • Thank you. what is a 'trading range?' – stochasticmrfox Nov 20 '18 at 21:16
  • Technical analysis is not about predicting, it is about listening to what the market is doing now and using the past to provide probabilities on back tested strategies to make trading decisions with protection in place. – Victor Nov 20 '18 at 21:20
  • @stochasticmrfox - a trading range is when the price moves sideways between a range of prices (eg. between $5.00 and $5.50). As the prices move towards the upper or lower range they will reverse and move in the opposite direction. This could go on for a few weeks, a few months or for years. – Victor Nov 20 '18 at 21:24
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    Technical analysis has nothing to do with protection. For that you need options or non correlated securities. Technical analysis does not affect probability either. At best, it identifies a trend but it provides zero assurance that the trend will continue. – Bob Baerker Nov 20 '18 at 23:02

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