world of economics

A signaling approach refers to the act of following various market signals as indicators for initiating trading positions. Technical analysis is often used to fuel this approach with trades initiated and completed by signals generated from technical studies on price charts. However, the approach is not limited to technical triggers. Any other form of data can also be used.

Understanding Signaling Approach

A signaling approach can be used by traders across any type of asset or securities provided they trade with sufficient liquidity and prices or other data are reliably and regularly published.

For example, consider how the trades of company insiders may be used as a trigger in a signal approach. This would be based on the notion that these insiders possess better knowledge of the business dealings of their respective companies, and may trade in accordance with that knowledge. If such knowledge gave them an advantage over other market participants, then following their trades might make for market-beating returns (or so the logic would go).

Numerous research papers have been written on the influence of insiders’ share ownership as well as their buying and selling activity, but no conclusive studies show an inherent advantage. However, following the trades of insiders is also broadly known as a signal approach to trading since insiders at companies are known to have greater insight on a company’s business dealings than the market overall.


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