What is a '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 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 average.

Chart courtesy of StockCharts.com.

RELATED TERMS
  1. Signaling Approach

    A signaling approach refers to the act of following various market ...
  2. Confirmation

    Confirmation refers to the use of an additional indicator or ...
  3. Rising Bottom

    Rising bottom is a pattern on a security's chart, considered ...
  4. Weekly Chart

    A weekly chart is a technical price chart where each data point ...
  5. Stock Jobbing

    Stock jobbing is the buying and selling of securities with the ...
  6. Technical Indicator

    Technical indicators are mathematical calculations based on the ...
Related Articles
  1. Trading

    Trend Trading: The 4 Most Common Indicators

    Learn about the top indicators and tools trend traders use to establish when trends exist and find entry and exit points.
  2. Investing

    How To Apply Technical Indicators To Mutual Funds

    Mutual funds do not readily lend themselves to technical analysis, but investors can use common indicators to evaluate mutual funds as easily as stocks.
  3. Trading

    Long-Term Traders Are Bullish on Commodities

    Bullish chart patterns on key commodity-related ETFs suggest that the remainder of 2017 could be the best time to buy.
  4. 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.
  5. Trading

    Technology and Consumer Stocks Fall to Support

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

    Measuring Stock Market Sentiment With Extreme Indicators

    Pay attention to how the exhaustion principle helps technical indicators signal trend reversals when abrupt value changes coincide with high trading volume.
RELATED FAQS
  1. Is Technical Analysis a Self-Fulfilling Prophecy?

    Technical analysis seems to be useful, but some say it is simply reinforcing what investors believe. Read Answer >>
  2. 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 >>
  3. What is the difference between a simple moving average and an exponential moving ...

    The only difference between simple moving average and an exponential moving average is the sensitivity each one shows to ... Read Answer >>
  4. What Do You Call a Candlestick With No Shadows?

    A candlestick with no shadow is seen as a strong signal of conviction by either buyers or sellers. Read Answer >>
  5. What is the best method of analysis for forex trading?

    Learn more about the types of forex analysis used by currency traders such as charting tools, economic indicators and/or ... Read Answer >>
Trading Center