Buy and sell signals are simply the two directions of a trade plan. A buy signal says 'go long'. A sell signal says 'go short'. Everything else, the entry, the stop and the targets, works the same way in both directions.
Buy Signal: The Long Side
On a buy (long) signal you expect price to rise. You enter, place your stop below the entry, and set targets above it. If price falls to the stop, the idea was wrong and you take the planned loss.
Sell Signal: The Short Side
On a sell (short) signal you expect price to fall. You enter, place your stop above the entry, and set targets below it. If price rises to the stop, the idea was wrong.
| Buy signal (long) | Sell signal (short) | |
|---|---|---|
| Expectation | Price rises | Price falls |
| Stop loss | Below entry | Above entry |
| Targets | Above entry | Below entry |
| Loses when | Price drops to the stop | Price rises to the stop |
Reading a Signal in Three Questions
- 1.Which way? Buy (long) or sell (short).
- 2.Where in? The entry price.
- 3.Where out? The stop for a loss and the target or targets for a win.
Reversal Signals vs Trend Signals
Some signals follow a trend: price is already moving and the signal says to join. Others are reversal signals: price has run a long way and the signal says it is turning. Reversal signals can give a better risk-to-reward because the stop can sit close to the turning point, but they are also more likely to be wrong, so the stop matters even more.
What a Good Signal Always Shows
- →The stop before the trade starts, not after.
- →The targets, quoted in R so you know the payoff.
- →A record of past signals including the losers.
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Try The Secret Vault FreeAre buy signals only for rising markets?
A buy signal is a long idea. In a falling market a sell (short) signal is the equivalent.