As I continue to use the TradeRadar software to analyze many different stocks in various situations, I am getting a better feel for the strengths and weaknesses of the BUY and SELL signals. There are definitely a few nuances users should be aware of when trading based on the signals.
Beware of earnings announcements --
Let's use a BUY signals as an example. Things will work the same for a SELL signal except in reverse.
When a BUY signal is generated, it is the result of a clear downward trend being broken. The stock has made a bottom and begun moving up. The downtrend may have lasted six months, a year or even more. Given the fact that the stock has been in a bearish phase, there is a certain amount of risk in buying the stock. We often see false rallies within bearish trends and there is always the potential that a BUY signal is a trap.
This is why I always recommend that users of the software do some research to become comfortable with the stock generating the signal. It is always worthwhile to verify that the fundamentals are turning positive and the TradeRadar signal is confirmed by a few other technical indicators.
I bring this up because earnings season is upon us. We often seen extra activity in a stock just prior to its earnings announcement. There are times when this activity moves the stock enough to generate a TradeRadar signal. If the earnings announcement is positive, the stock continues the new trend identified by TradeRadar. If the earnings announcement is not so good, the stock can get slammed. Hence, it pays to be extra careful at this time of year and look for confirmation of the signal.
Those who have purchased the TradeRadar Alert HQ lists of stock signals know that I always provide several technical indicators with each stock pick. These indicators include 50-day moving average assessment, DMI, Aroon and Chaikin Money Flow. These same indicators can be viewed at StockCharts.com and I would encourage users to take advantage of this great, free site to assess the charts of stocks that have generated signals.
Look for good entry points --
Another aspect of the how the TradeRadar software generates signals is the fact that a stock has to begin moving before the signal will manifest itself. In the case of a BUY signal, after a downtrend completes, some stocks then move up quickly. What I have observed in these cases is that by the time a signal has been generated, the stock has moved into a somewhat overbought state. This can be seen by looking at RSI or Bollinger Bands. Looking at the charts at StockCharts.com, a user will often see the stock pressing up against the upper Bollinger Band.
In this kind of situation, it can be prudent to wait. Often the stock will back down toward the midpoint of the Bollinger Bands. In terms of timing, it may be more appropriate to initiate the trade at this point. It provides a lower risk entry point.
I hope users of TradeRadar find these tips helpful. If anyone has tips they wish to share with the community of users (and there are about 500 of us now) please feel free to comment on this post or begin a discussion on our user group forum.
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