Wouldn’t it be great to have a free technical analysis software that also provide buy and sell signals? Well, it may not be as good idea as it seems for the first sight.
What are buy and sell signals?
Buy signal suggest when to buy an instrument, and sell signal suggest when to sell it.
It may seem quite easy to follow them, though even if we have a buy or sell signal, we still have to find out how much money is to be invested. The reason for that may be shocking, but these signals are not always right, and when a signal is not right, we can lose money.
The fact that we have buy and sell signals from some source does not guarantee, that those will also make us profits. There are signal sources, that are outperformed even by pigeons. (There was an experiment where pigeons were fed on a newspaper, and people bought the stock whose article was under the breadcrumb picked by a pigeon… And sometimes this performed better than well educated brokers. Interesting, isn’t it?)
We must also consider, that if one signal source has made us profits once, it may not be making profit next time. Actually, a quite long statistics is needed, to be able to call a buy-sell signal reliable.
Signals in a technical analysis software
Technical analysis softwares may support buy and sell signals in multiple ways:
- according to the definition of technical indicators: technical analysis softwares always contain multiple indicators, where the buy and the sell signals are defined obviously (like two curves are meeting, or a value is above 70% etc.).
- some technical analysis softwares are highlighting these points as buy or sell signal
- it sounds very simple to follow these signals. The problem is that – as we mentioned above – these can be wrong, so following them blindly may result in loss of money.
- some technical analysis software do not support even this simple method of buy/sell signals.
- some softwares allow to run algorithms that are more complex than following blindly this or that indicator, and these may have better performance then raw indicators. However, why would anyone provide such algorithm for free, if it generates reliable profit?
- some softwares are embedded in a trading platform, where algorithms can also make the trades for you (algorithmic trading / trading robots). Without human control, this can result in direct loss of money when the algorithm is wrong.
About the risks of buy and sell signals
We are not saying that all buy and sell signals are useless and will burn one’s lose money. However, these two rules of thumb may be worth to consider:
- if something is working, but it is too simple or too cheap, why isn’t everyone using it? (Perhaps, because it is not working… And this does not mean that expensive signals are guaranteed to be good…)
- if something provides reliable profits, why would anybody provide that for free?
Signals must be used very carefully. Some hints for handling these signals:
- backtest the signals on past data before using it in the present. Make sure to have enough statistics to be able to say, that the signal is reliable to some good extend.
- never riks so much money on the stock / forex / commodity etc. market, that would ruin your personal finance
- try to limit losses every possible way, like
- placing stop-loss orders,
- by limiting the overall loss of the account (if possible – eg.: avoid leverage, and derived instruments), and
- by limiting the money that is in the account etc.
- if you are so successful, that your money is doubled, it may be a good idea to withdraw the half of the money in the account – this way if all is lost in the account, you may still have the starting capital.
Remember, that these hints do not guarantee, that you will avoid losses – but may help you.