The best trading signals, just like the best trading system can not necessarily be given to you in a list. This is because they are different for everyone depending on the type of system and the concept you are trying to trade.
The more I get into trading and trading systems, the more I realize that every aspect of a trading system needs to fit the trader’s needs and personality. Trading signals are no different.
I have found that when I start with my beliefs and use them to define what my trading system is trying to do, I can easily find the best signals for me.
For example…let’s say that I believe that a good time to enter the market is after a small pull back from the primary trend followed by a resumption of the trend.
If you held this belief, the best trading signal may be something like:
The best signal in this case probably wouldn’t be any of the following:
If you have not already documented your beliefs about each component of the trading system that you are trying to develop, then I strongly suggest that you stop and do this.
Let’s run through an example together to make this real. This is not to be taken as a recommendation or advice in any way, it is simply an example of the beliefs based approach to finding the best trading signals. Here is the worked example for each of the 3 steps:
Here are a set of hypothetical beliefs about each component of a trading system: Lets say I believe that…
For these beliefs some potential considerations for the best trading signals are below. Note that the number values have been selected arbitrarily so you will need to test various values to find those you are happiest with:
Now that you have a short list of potential trading signals, it is time to determine which ones are the best trading signals for you.
My approach to this is to use my trading system backtesting software to program each combination of signals into a trading system and determining which combination performs the best.
With three possible trading signals for each of the four system components mentioned, that is 81 combinations (this is left as an exercise for you because it will be done differently depending on what trading software you are using).
You are looking for the combination of trading signals that give you the highest profitability – these will be the best trading signals. You will then go on to optimize the trading signals to further improve the profitability of the trading system.
While it is possible to test each signal on its own to see how well it works, this assumes that they all act in isolation…but in a trading system components don’t act in isolation – they act as a system! For example, your Setup Rule, Entry Trigger and Initial Stop all work very closely together in the initial stages of a trade. The Initial Stop and the Exit Rule work closely together as the trade progresses. No component of the trading system acts in isolation.
You will only be able to determine the best trading signal in the context of all the other components of your trading system. This is why I think it is ridiculous that so many websites, books and courses will try to sell you the best trading signals (for a significant price)…they have no way of knowing what are going to be your best trading signals. Only you can determine that because all of your signals interact with each other!!
Once again I find myself reinforcing that you have to document your beliefs first to design a trading system that will be profitable and work for you in the long run. This is a common theme that runs throughout Trading System Life!
I believe this is the best approach because it saves time, ensures you build a system you are comfortable trading and it helps avoid data mining and over optimizing to past data.
There are two next steps that I would recommend at this point:
The first is for newer traders who are at this point asking questions like:
If you found yourself asking any of these questions while reading the discussion above then you need a good resource that explains all the common trading signals and indicators. There are several books that do this well, but one of my favorites is The Encyclopedia of Technical Market Indicators by Robert Colby.
This book provides a detailed explanation of a large number of indicators and is a useful reference for all aspiring technical or system traders. I suggest you buy the book and use it to help you come up with ideas for your best trading signals. Too many traders try to reinvent the wheel here – there are lots of useful indicators already available…use them.
The second recommendation is for aspiring traders who already understand some of these basics and want a step by step walk through of how to design a trading system that will work for you. To help you with this, I suggest you look at Van Tharp’s excellent home study program called How to Design a Winning Trading System that Fits You. I have used this program and found it to be extremely beneficial.
I can’t recommend Van’s materials and courses highly enough. Van has really isolated the critical components that distinguish between the very few outstandingly successful traders and the vast majority of losing traders. If you want to design a trading system that will put you in the exclusive group of profitable traders then I suggest you consider this self-study course.
The third recommendation is for every reader – and that is to stop Googling ‘Best Trading Signals’ hoping to find the one magic bullet indicator that will make you rich.
The way you get rich is to design a profitable trading system that fits your needs and personality, document the trading system properly in a complete trading plan and then execute that trading plan flawlessly and consistently without making trading mistakes which damage your profitability.
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