What is 'Signaling Approach'

A signaling approach refers to the act of following various market signals as indicators for initiating trading positions. In general, technical analysis is based on this approach with market trades initiated from signals in price series chart analysis. Following the trades of insiders is also broadly known as a signal approach to trading since insiders at companies are known to have greater insight on a company’s business dealings than the market overall.

BREAKING DOWN 'Signaling Approach'

A signaling approach is used by traders across a wide range of securities. In general, it forms the basis for technical analysis and influences buying and selling orders. Additional insight for market signaling can also be gathered from following the trades and share holdings of insiders at a company. Numerous research papers have been written on the influence of insiders’ share ownership as well as their buying and selling activity.

Technical Analysis

Technical analysis is based on following market signals that lead to inferences about potential price moves in securities. This is typically done by daily candlestick price charts which detail the daily activity of a security’s price over time. These candlestick patterns are known to follow trends which can be charted by price channels and envelope channels over time. Patterns within a price trend can also provide significant insight about a security’s potential direction These inferences are used by traders to take a variety of long and short positions which profit from signals identified in technical analysis.

Insider Information

Watching the activity of insiders at a specific company can also provide insight on trends in the company’s stock price overall. In general, trading on nonpublic information by any investor is illegal. However, insiders at a company have a much broader and comprehensive knowledge of the business and its outlook which makes their trading activities beneficial to watch for outside investors.

When following insiders there are a few factors to consider. One includes shareholder grants. Insiders are typically granted stock and stock options. Therefore when ownership increases through grants it can be a positive signal for the company. Adversely, insiders are also significant shareholders with substantial capital invested in publicly traded stock. Thus, when insiders are selling high volumes of shares it can be a negative indicator for the stock’s outlook.

In some situations, buying and selling of high volumes of shares can also be an indicator that certain information about a company has not yet been grasped or fully factored into the stock’s price. In general, The thinking goes that if a high level executive, such as a chief executive officer, is selling, he or she is probably doing so for a reason that you, as the public, may or may not know yet, so it can be an indicator that you should also follow their lead. The same is true for high volume buying. If an insider is buying stock in his or her company, it can be a signal of positive changes in the company’s financials and stock price.

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