Buy and Sell Signals

"Treat all signals the same."

Your system entry rules generate a signal when a trade should be opened.
Depending on the direction of the market, the signal will be to buy for a long trade or sell for a short trade.

Conditions have to be met before the signal is triggered and these conditions are known as your rules.

Most conditions are pretty straightforward, often involving daily moving average values of the commodity price. These moving averages are usually shown as lines on price charts and commonly, at least two different moving average lines are shown in different colors.

Crossover systems are popular, in which signals are generated when moving
average lines cross each other.

Bare price charts are rather formless and perplexing and it is surprising how much structure appears to arise from the addition of just one or two 'signal lines' like those mentioned above.

Charts look much different in these circumstances and patterns (real or imagined) can be seen much more easily.

When lines move vigorously, a market may appear to have made up its mind where it is going, in a more determined way than when more feeble movements are taking place. So two different crossovers on the same chart may look different in character to each other.

Newcomers to trading are inclined to attribute human intentions to these line movements and see determination or lack of commitment reflected by vigor of movement, for example. They are more likely to take note of what they regard as confident moves than those that seem hesitant.

Traders in this frame of mind are prone to interfere with their systems and pass up feeble signals whilst 'double loading' confident signals.

If as we would hope, the trader has evaluated his system thoroughly, he will have given equal weight of importance in his testing to all market entry signals. This is as it should be - and therefore any deviation from that treatment in live trading is a serious mistake.

Professional traders treat all signals generated by their rules as having equal weight. To do otherwise would break that golden rule (Follow Your System) and invite disaster.

A systems trader's rules always contain unambiguous conditions under which trades will be opened. A buy is a buy and a sell is a sell. There is no such thing as a 'strong buy' or 'weak sell'. So all conditions are regarded equal without qualification.

N. B. The size of position taken when a trade is opened, has nothing to do with 'how strong or weak' the signal looks. Professional traders invariably size their positions according to the level of risk they are prepared to take and trading capital available at the time of entering a particular trade.

 

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Copyright David Bromley 2006
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