What is a Sell Signal
A sell signal is a condition or measurable level at which an investor is alerted to sell a specified investment. Sell signals can be generated through a variety of methods. They are also observed and utilized by different types of investors.
BREAKING DOWN Sell Signal
Sell signals can be generated from a variety of signaling methods. They are used by all types of investors in many different investing regimes. Fundamental analysts generate sell signals when a security’s fundamental value reaches a certain level. Technical analysts will use charting techniques to generate sell signals based on technical patterns. Other investors may simply follow the crowd for sell signals, selling with high volume market selloffs.
Regardless of the type of methodology used, many investors will have a pre-determined level identified as a sell signal at some point during an investment’s duration. Sell signals may be developed at the onset of an investment with fluctuations over time. They may also be established during the life of an investment as developments occur or risk tolerance levels change. Stop loss orders are one of the best ways to implement risk mitigation around a sell signal in order manage potential losses. Investors can initiate standard stop loss orders with no expiration to provide protection. They can also easily adjust stop loss order price levels if a sell signal level changes over time.
Fundamental Sell Signals
Fundamental analysts build financial models viewing their valuation of a stock based on certain variables. The most common type of fundamental analysis used by fundamental analysts is discounted cash flow which uses a breakdown of company earnings and free cash flow to generate a market valuation through discounting. This methodology is typically built to generate a range of values for a security using various different assumptions. Thus, various scenarios and assumptions can generate price level ranges for which an analyst believes it is best to buy and sell a security.
Analysts may also use various other parameters and metrics that may lead to a sell signal as well. Debt signaling is one metric focused analysis method that some fundamental analysts may use for sell signals. Using this type of methodology analysts may have certain ratio levels that can cause a sell signal alert such as when a company’s total debt to assets rises above a certain level.
Technical analysts will focus on charting patterns to provide sell signal alerts. In technical analysis there are several technical chart patterns that lead to a sell signal. One of the most common sell signaling approaches involves the use of channel charting. Channel charting creates resistance and support trendlines based around the technical chart patterns of a security’s price. Since most securities follow a trending price and remain within their resistance and support channel boundaries over time, the resistance trendline can be a good sell signal indicator. Generally, security prices are expected to resist pushing through resistance trendlines creating sell signal alerts that can be profitable from a down trending reversal.