DEFINITION of 'Buy Signal'

A buy signal is an event or condition that alerts a person to place a purchase order for an investment. Buy signals can be either observed by analyzing chart patterns or calculated by trading systems. For example, momentum traders may look for a short-term moving average to cross above a long-term moving average as a buy signal.

The opposite of a buy signal is a sell signal.

BREAKING DOWN 'Buy Signal'

Buy signals may be used by short-term traders and long-term investors. For example, contrarian investors may look at a significant sell off as a buy signal since the market may have overreacted or a value investor may look at a price below net asset value per share as a buy signal. On the other hand, a trader using an automated trading system may automatically generate buy and sell signals based on a set of rules.

Some of the most common buy signals include:

  • Chart Patterns - Many chart patterns generate a buy signal when the price moves beyond a certain level. For example, an ascending triangle pattern generates a buy signal when the price breaks out from the upper trend line resistance.
  • Technical Indicators - Many technical indicators generate a buy signal when certain conditions are met. For example, the relative strength index (RSI) generates a buy signal when it moves below oversold conditions at 30.0.
  • Intrinsic Value - Many value investors calculate intrinsic value with discounted cash flow analysis, net asset values, or other techniques. When the price moves below this value, a buy signal is typically generated since the stock is trading at a discount.

While many technical indicators generate buy signals, it's important to note that they shouldn't necessarily turn into purchase orders. Many traders look for confirmation from other technical indicators or chart patterns before actually placing a trade. For example, a moving average crossover may generate a buy signal, but the trader may look for confirmation in the form of a breakout from a pivot point or other strategy.

There are some black box trading systems that generate buy signals for subscribers. For example, an investment research firm may generate a complex neural network that generates buy and sell signals that they send to subscribers that pay a monthly fee. Traders should approach these black box models with skepticism since past performance may not be indicative of future performance.

Example of a Buy Signal

The chart below shows an example of a buy signal generated from a moving average crossover in the SPDR S&P 500 ETF (NYSE ARCA: SPY).

Example of a Buy Signal in an S&P 500 Chart

In the chart above, a buy signal was generated when the 50-day moving average crossed above the 200-day moving averge.

Chart courtesy of StockCharts.com.

RELATED TERMS
  1. Sell Signal

    A sell signal is a condition or measurable level at which an ...
  2. Signaling Approach

    A signaling approach refers to the act of following various market ...
  3. Debt Signaling

    Debt signaling is a theory that associates the future performance ...
  4. False Signal

    In technical analysis, a false signal refers to an indication ...
  5. Moving Average Convergence Divergence ...

    Moving Average Convergence Divergence (or MACD) is a trend-following ...
  6. Rising Bottom

    Rising bottom is a pattern on a security's chart, considered ...
Related Articles
  1. Trading

    3 Chart Patterns That Suggest Prices Are Headed Lower

    Long-term sell signals on the charts of some larger players suggest that the broader markets could be prepping for a major move lower.
  2. Investing

    The Contrarian: About BAML's Sentiment Indicator

    Bank of America/Merrill Lynch's Sell Side Indicator measures investor sentiment, badly.
  3. Trading

    3 Charts That Suggest Financials Are Headed Higher

    Bullish patterns have emerged on the chart of a key financial ETF and several of its top holdings.
  4. Trading

    Technology and Consumer Stocks Fall to Support

    Technology and consumer discretionary ETFs have fallen to channel support. Buying opportunity or time to sell?
  5. Trading

    Using Technical Indicators to Develop Trading Strategies

    There is no perfect investment strategy that will guarantee success, but you can find indicators and strategies that will work best for your position.
  6. Trading

    How to Interpret the Volume Zone Oscillator

    Introduced in 2009, the volume zone oscillator (VZO) is gaining traction with traders and technicians.
RELATED FAQS
  1. How do experienced traders identify false signals in the market?

    Learn how traders identify false signals in the market when using indicators and strategies to better identify true market ... Read Answer >>
  2. How do I use Stochastic Oscillator to create a forex trading strategy?

    Learn about the stochastic oscillator and how to it is used to create an effective forex trade strategy, including how to ... Read Answer >>
  3. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
  4. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
  5. What are the best technical indicators to complement the Stochastic Oscillator?

    Explore the function of the stochastic oscillator indicator, and discover other technical indicators traders use to complement ... Read Answer >>
  6. How is a simple moving average calculated?

    Learn about the simple moving average, how the indicators are used, and how to calculate a stock's simple moving average ... Read Answer >>
Trading Center