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. Price By Volume Chart - PBV

    A price by volume, or PBV, chart is a horizontal histogram plotted ...
  3. Signal Line

    Signal lines are used in technical indicators, especially oscillators, ...
  4. Forex Signal System

    A forex signal system interprets data to create a buy or sell ...
  5. Derivative Oscillator

    The Derivative Oscillator is a technical indicator that applies ...
  6. Trade Signal

    A trade signal is a trigger, based on technical indicators or ...
Related Articles
  1. Trading

    Momentum Trading With Discipline

    This type of strategy demands a continual refinement of entry and exit techniques.
  2. Investing

    Calculating volatility: A simplified approach

    Though most investors use standard deviation to determine volatility, there's an easier and more accurate way of doing it: the historical method.
  3. Investing

    The top technical indicators for commodity investing

    See how traders can use "the usual suspects" standard for trend trading when it comes to choosing indicators for commodities investing.
  4. Trading

    MACD: A Primer

    Learn to trade in the direction of short-term momentum.
  5. Trading

    Gauging Support & Resistance With Price By Volume

    This straightforward histogram can help you analyze the buying and selling interest in a stock.
RELATED FAQS
  1. What are the best technical indicators to complement the Moving Average Convergence ...

    Learn the best technical indicators to use as part of a trading strategy in conjunction with the moving average convergence ... Read Answer >>
  2. What are the best technical indicators to complement the Dynamic Momentum Index?

    Use other technical indicators to complement the use of the dynamic momentum index in analyzing a market and determining ... Read Answer >>
Hot Definitions
  1. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  2. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  3. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  4. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  5. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
  6. Hedge Fund

    A hedge fund is an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions.
Trading Center