Trading signals are the pillars of technical analysis, enabling investors to position themselves discerningly.
Whether experts or beginners, traders seek to limit the uncertainty factor in their financial investments. They wish to limit the risks and ensure good capital gains. Therefore, they rely on as much objective data as possible to anticipate price fluctuations and to place their buy and sell orders optimally. Among these data, trading signals are absolutely essential, forming the basis of technical analysis.
Here is a comprehensive summary of the information you need to know about the best buy signals and how to spot them on stock charts.
Moving averages are used to represent a series of values over a given period of time, while eliminating unnecessary fluctuations as much as possible. In trading, they smooth out market noise and thus accurately represent trends in financial assets. The 200-day simple moving average is a popular chart indicator for medium and long-term investors.
In the context of technical analysis, it offers particularly interesting buying signals. When the price of an asset rises above the 200-day moving average, the trader can deduce that an uptrend is underway, and therefore position themself to buy.
The dragonfly doji is a chartist Japanese candlestick pattern. It is an indecision pattern particularly suited to day trading, although it can be used on any time scale. The dragonfly takes the form of a candle with no upper shadow, no body, and a long lower shadow. It takes place when the opening and closing prices are at the same level, and the lowest level is much lower than the opening, closing, or highest level. When it appears within a downtrend, the dragonfly indicates an upward reversal, i.e a major buy signal.
The Morning Star is also a chartist Japanese candlestick pattern that is recognized as a reliable technical analysis signal. It is made up of three separate candles :
The morning star appears within a bearish trend. The first candle confirms the market's downward movement, the second candle indicates the trend is running out of steam and is likely to reverse, finally confirmed by the third candle. With the trend moving up again, this is the time to buy for the investor.
The RSI, or Relative Strength Index, is a technical indicator that highlights phases of market euphoria. The RSI value of a given financial instrument provides valuable information to traders: from 0 to 100, it highlights overbought periods, neutral periods, as well as oversold periods of the said instrument over a predetermined period. Therefore, if a financial asset is in an oversold zone - indicated by an RSI below 30 - its price has fallen sufficiently and should bounce back up. This is a strong buy signal.
A well-known chartist figure known to all traders, the inverse head and shoulders pattern is widely used and no longer has to prove its effectiveness. Its configuration is the exact symmetry of the classic head and shoulders. It therefore indicates a trend reversal, following a downward movement.
This pattern consists of three bottoms bouncing off a horizontal line (or "neckline"), indicating three consecutive failures of sellers to make the market move further downward. At the same time, the buying forces strengthen three times before creating a true upward trend reversal. Thus, the inverse head and shoulders is an excellent buy signal, as well as being relatively easy to spot on a stock chart.
The best buying signals are all part of technical analysis. Whether technical indicators - i.e. calculation formulas - or recurring chart patterns, they allow investors to place orders while limiting risks and optimizing gains.