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I see many postings about individual indicators, but few about how a
complete trading signal is constructed using a set of indicators.
Here are my suggestions based on EOD trading.
I have found that higher probability trading signals are best
constructed with a few indicators, each with a different
characteristic. I prefer to use one indicator of each type: cycle
based, volume influenced, and market breadth.
Cycle. This could be a stochastic, or the cycles per Walter
Bressert. I like to see how two of these are acting, each with a
different look-back period, e.g. 5 and 10 bars. Even in an extended
trend, cycles can work.
Volume influenced. Chaikin volume, OBV or Twiggs volume (google for
it) can serve this purpose.
Market breadth. An advance/decline measurement or new highs vs. new
lows will do.
Once you have settled on a set of indicators, study how each of the
indictors in the set act over time for securities you want to trade.
Open a window with each of the indiators in an inner window and see
how each acts over many years for the securities of interest. Get
to know subtle characteristics of each indiator. You will want to
spend at least several months of 2 hours per day.
I tend to trade stock indices, e.g. Dow Jones, NASDAQ 100 and Russell
2000, on a few day swing basis. I have studied my set of indicators
over years of price action for these. Determine what weighting you
will give to each indicator. You also have to determine the time
frame of interest for your trading, and tune the periods associated
with the indicators for it. Now, you can refine your understanding
of how/to what degree price predictive behavior can be discerned
based on the interaction of indicators in the set. Then backtest
and/or forward walk to confirm that the set can be profitably traded.
Example. I shorted the NQ-100 (futures) just before the normal hours
market close on
Feb. 23, 2007 and closed the short at the close on Feb. 27, 2007.
This was an unleverage move of about 4.5%.
Why the entry?
My A/D indicator had been at a relative peak and was starting to roll
over; my volume based indicator was also moving down from a relative
high level; my cycle indictor was also just starting to roll over
from a high. There are several further subtle interpretations that
influenced the trade entry.
Why the exit?
Normally I would have waited for a confirmation from the set,
considered as a whole which was not present. However, with a lot of
profit on the table and with a subtle interpretation of the
interaction of my two cycle indictors, I was guessing that there was
a substantial likelihood of a bounce the next day. So I exited,
ahead of the normal exit.
My trades are not all profitable. But substantially more trades make
money and the $profit/$loss is well above 1.
I have nothing to sell - no services or products. I am making this
posting as a contribution for those who may find something of use
from it.
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