Construction of trading signals (not indicators)

["Gerrit Jacobsen" <jrt@xxxxxxxxxx>]

I have come across some very common problem which appears when one 
constructs trading signals.

What has been bothering me is the following:

Lets say I have got a two indicators which work well across a number 
of markets and which are meant to have a predictive meaning. They 
are implemented in the following way:

IF (Indicator1 > threshold1) and (Indicator2 > threshold2) then buy
IF (Indicator1 < - threshold1) and (Indicator2 < - threshold2) then 
sell

Basically two conditions must be satisfied before a long position is 
established or reversed.

This system works well however it is wrongly constructed in my 
opinion because if I assume that these indicators have got 
a predictive meaning then one should not be in a position when one of 
the conditions is NOT satsified. So from a logical point of view the 
system should be rather:

IF (Indicator1 > threshold1) and (Indicator2 > threshold2) then buy;
IF (Indicator1 <=  threshold1) or (Indicator2 <= threshold2) then 
exit long;
IF(Indicator1 < - threshold1) and (Indicator2 < - threshold2) then 
sell; 
IF(Indicator1 >= - threshold1) or (Indicator2 >= - threshold2) then 
exit short;

Basically the system is only in the market when both conditions 
are satisfied and not as in the first case until a new position is 
established.

However this system does not perform at all profits. So what is 
the conclusion from this exercise ?

1. The indicators are not valid at all.
2. The indicators are only wrong for the exit signal.

Has anyone got any suggestion how to test either of these theories ?

Gerrit Jacobsen