Sell Signal

What Is a Sell Signal?

A sell signal is a condition or measurable level at which an investor is alerted to sell a specified investment and can have an impact on performance.

Understanding Sell Signals

A sell signal can be generated through a variety of methods, for example, a pre-determined percentage decline in the asset's value, a technical indicator, a fundamental change in the asset, or a trailing stop-loss. The sell signal may automatically close the trade, like on account of a stop-loss order, or the investor/trader may need to manually close the position after receiving the sell signal from their method/strategy.

Sell signals can be generated from a variety of signaling methods. They are used by a wide range of investors and traders, from day traders to long-term investors. Fundamental analysts generate sell signals when a security's fundamental value reaches a certain level. The sell signal could be based on the fundamentals reaching generally high levels, or because they are starting to decline.

Technical analysts will use charting techniques to generate sell signals based on technical patterns and indicators. For example, assuming an asset falls below a support level, the technical trader may view that as a sell signal. In the event that an asset falls below a certain level on a technical indicator, or becomes overbought and begins to decline, or falls below a moving average, these could be generally used as potential sell signals. Other investors may simply follow the market for sell signals, selling when the major indexes experience a high-volume selloff.

Regardless of the type of methodology used, many investors will have a pre-determined level identified as a sell signal. Sell signals may be developed at the onset of an investment, and that level may be adjusted over time as conditions change. The sell signal may likewise be established during the life of an investment as developments happen or risk tolerance levels change.

Stop-loss orders are one of the best ways of implementing risk relief and manage potential losses. Investors can easily change stop-loss order price levels in the event that a sell signal level changes over time.

Fundamental Analysis Sell Signal

Fundamental analysts build financial models for the valuation of an asset-based on certain variables. They may use discounted cash flows, which uses a breakdown of company earnings and free cash flow to generate a market valuation through discounting. This methodology is typically worked to generate a range of values for a security utilizing different assumptions. Subsequently, different scenarios and assumptions can generate price level ranges for which an analyst believes it is best to buy or sell a security.

Analysts may likewise use other parameters and metrics that may lead to a sell signal. Debt signaling may cause a sell signal when a company's total debt to assets rises above a certain level, for example.

Other investors may sell when earnings growth begins to decline, or when the price/earnings (P/E) reaches a level that doesn't legitimize future earnings prospects.

Technical Analysis Sell Signal

Technical analysts will zero in on charting patterns and technical devices to provide sell signal alerts. Some may look for a decline below a supporting trendline to generate a sell signal. Others may sell into strength, deciding to exit when the price is energizing aggressively to the upside.

Chart patterns, for example, triangles and head and shoulders patterns, have their own sell signals. Each pattern has a profit target for taking profit on profitable trades, and a stop-loss level for cutting losses in the event that the trade doesn't work out.

Technical indicators are additionally used to generate sell signals. A trader may look for indicator crossovers, for example, a MACD crossover, or a shorter-term moving average crossing below a longer-term moving average. A trader may likewise use levels on an indicator to signal an exit, for example, when the relative strength index (RSI) falls below 30, or rises above 70 however at that point falls below it.

Sell Signal Example

Assume a trader heavily relies on the 100-day moving average (MA) as part of their trading strategy. They like to buy when an uptrending stock touches the 100-day MA however doesn't fall more than a few percent below it. When the price gets rising going the MA they buy. In the event that the price drops through the MA and keeps dropping, they sit idle. On the off chance that they are in a long trade, they sell in the event that the price falls more than 4% below the MA.

Here's an example of how these rules might have been applied in Apple (AAPL) stock.

As the price begins its uptrend, it tests the 100-day moving average yet rapidly begins to rise off of it, which generates a buy signal. On the next two tests, the price marginally drops below the MA, however not by the 4% (or greater) required to generate a sell signal. The trader could maintain their position or add to it at these junctures.

On the next test, the price falls below the MA by more than 4%, which causes a sell signal and the trader exits their position.

Highlights

• Sell signals are typically based on fundamental or technical analysis.
• Sell signals can be automated, like with a stop-loss order, or the sell signal may just alert the trader to sell and afterward they implement the sell order manually.
• A sell signal is anything that alerts a trader to sell an asset.