Trading Basics: Signals
Each indicator gives signals, based on which, traders can decide whether to buy or sell. Each signal can be of:
1) different strength, some of them are less significant while others are very important depending on context, and
2) can be valid for different time periods even within one chart.
Conceptually, signals can be grouped into three major categories.
First, “trend related signals” which indicate trend direction or market phase and its strength.
Exponential Moving Average (EMA) 20 = strong trend
Exponential Moving Average (EMA) 50 = medium trend
Exponential Moving Average (EMA) 100 = medium-to-long trend
Exponential Moving Average (EMA) 200 = long trend
In the image, the price bounced several times from EMA with p=50 (green dotted line), indicating medium trend.
Second, “price level indicating signals” define levels of value and their strength, where the price can reverse or break the level, which signals that the price can go in the opposite direction. For example, indicators support/resistance, trendlines, or PBV.
In the image, the support can be observed (horizontal line).
Third, “momentum indicating signals” signal that momentum has started or the market has started to show strength towards a particular trading direction.
In the image, the candlestick pattern called Three Line Strike can be observed, indicating a momentum to the upside.