Trading signals: what they are and how to check them

Written by the Tactfolio research teamPublished 4 min read

A trading signal is a prompt to buy or sell. It comes either from a rule you can see or from a person or service you pay. A rule’s signal, like “the price crossed its 200-day average”, can be tested on past prices. A paid tip service’s signal usually cannot, and US regulators warn that signal sellers are a common route to fraud.

Key points#

  • A signal is only as good as the rule behind it. If you cannot see the rule, you cannot test it.
  • Many signal apps, chat groups and social media accounts send alerts with no full record of past calls.
  • The CFTC and SEC both warn about signal sellers, fake “winning trades” and pump-and-dump schemes.
  • No one can promise returns. Claims of profit with no risk are red flags.
  • Tactfolio sells no signals and gives no advice. You write your own rules and see their full backtest.

What is a trading signal?#

A trading signal is a trigger that says “buy”, “sell” or “hold”. It comes from one of two places.

  1. A rule. A fixed test on price data, such as “hold SPY while it is above its 200-day moving average”. Anyone can check what the rule would have done on past prices.
  2. A service. A person, app or group sends alerts. You usually cannot see the rule, if there is one, or a full record of every alert.

Most rules are built on chart tools such as moving averages or the RSI indicator. Our guide to the best indicators for trading explains what each one measures.

Are trading signal services legit?#

Some are run honestly, but you usually cannot tell from the outside, and regulators have seen many frauds. The burden is on you to check.

The CFTC, the US regulator for futures and related markets, warns about this in its advisory There’s Nothing to Like About Scammers on Social Media. It lists schemes that sell trade signals, trading software and “secret” strategies. It says signals often come with hidden costs or do not perform as promised. Fake profiles post screenshots of “winning trades” and huge account balances.

A later CFTC advisory, AI Won’t Turn Trading Bots into Money Machines, covers AI-branded signal and bot schemes. They promise returns that are too high or certain. It says AI cannot predict the future or sudden market changes.

Trading signals on social media and pump-and-dump schemes#

The SEC warns that stock tips on social media can be part of a scam. Its February 2026 alert, Social Media and Stock Tip Scams, says never to decide on an investment only from social media. It flags group chats, people posing as famous investors, and promises of high returns with little risk.

A pump and dump is a two-step scheme, as Investor.gov describes it. Promoters push a stock’s price up with false or misleading posts. Then they sell their own shares. The price falls, and the people who bought on the tip lose money.

How to check a trading signal before you trust it#

Ask for what an honest rule can always show.

  • The rule itself. What exactly triggers a buy or a sell?
  • Every signal, not the best ones. A record that skips the losers is an ad.
  • The bad years. How far did it fall, and how long did it take to recover?
  • Costs. Fees, subscription costs and trading costs all come out of returns.
  • Who is behind it. The SEC alert above points to a free Investor.gov tool for checking whether a person or firm is registered.

Even a full backtest can mislead if the rule was tuned to fit the past. Our page on why past results mislead explains how. Our guide to backtesting covers what a fair test looks like.

Common mistakes#

  • Trusting a “win rate”. Many small wins and a few huge losses can still lose money.
  • Trusting signals because they are free. The CFTC notes that these schemes often push you to pay for upgrades or invest more.
  • Acting fast on a hot tip. Pressure to buy now is a classic pump-and-dump sign.
  • Following signals you do not understand. If you cannot explain the rule, you cannot know when it stopped working.

Try it on Tactfolio#

Tactfolio sells no signals and gives no advice. Instead, you can write your own rule and see its full backtest before you trust any signal. Take a rule like “hold the S&P 500 while it is above its 200-day average, else Treasury bills”. In the strategy builder, it shows every year of its hypothetical history, including the bad ones. If you choose to run it, it trades your own Alpaca account once a day. Strategies on US stocks and ETFs run on daily prices and hold long positions only.

Common questions#

Are free trading signals any good?#

Free signals cost no money up front, but you still carry the risk of acting on them. Many free channels exist to sell paid tiers or to steer you to a trading platform. Judge them the same way: ask for the rule and the full record.

Is there a trading signals app I can trust?#

Look for one that shows its exact rules and every past signal, including losers. Check that the people behind it are registered where they need to be. Be wary of any app that promises high or steady returns.

What is the difference between a signal and an indicator?#

An indicator is a number, like a 50-day average or an RSI of 72. A signal is a decision drawn from it, like “sell when RSI rises above 70”. The same indicator can feed many different signals.

How do I report a trading signal scam?#

You can report suspected fraud to the SEC through Investor.gov or to the CFTC at its complaint page. Keep screenshots, messages and payment records.

Sources

Put it into practice