| What are stock trading signals? The answer is going | | | | parameters. For example we may wish to put a stop |
| to depend on who you ask. | | | | loss on the average low and take profits on the |
| For example dyed-in-the-wool contrarians might | | | | average high plus 150% of the AVERAGE DAILY |
| believe that a stock trading signal to sell stocks might | | | | RANGE. |
| be when Time Magazine runs a picture of a bull on its | | | | In any case I have created trading signals from the |
| cover. A dyed-in-the-wool technical analyst on the | | | | simplest ideas of market momentum theory and |
| other hand may look for certain stochastic numbers | | | | using the most limited number of parameters. And |
| on a 30 minute bar chart to indicate when to buy a | | | | for this reason this little trading system will probably |
| certain stock. And finally a dyed-in-the-wool | | | | tame the randomness of short term stock market |
| 'fundamental' investor may consider certain financial | | | | movements and it will probably make some money. |
| numbers of the underlying business to be a trading | | | | But in this article I am not trying to design a trading |
| signal. | | | | system. What I want to do here is simply to |
| So to this mix let me now add what I think is a true | | | | demonstrate my ideas of what constitutes a valid |
| and usable definition of a stock trading signal. Let me | | | | trading signal. In my view a stock trading signal should |
| give you an example of the kind of signal I like. | | | | embody the following: |
| Take any given stock and look at all the daily bars | | | | 1) A stock signal must be mathematical and precise in |
| for the past 10 days. Next subtract all the highs from | | | | nature. |
| all the lows to get all the daily ranges for each of the | | | | 2) A stock signal must be programmable into a |
| 10 daily bars and then calculate the average range | | | | computer so the computer and not the trader can |
| for those ten days. Let's call this AVERAGE DAILY | | | | track the relevant markets and alert the trader to |
| RANGE. Next divide each daily range by two to get | | | | when the trading signal has been hit. This allows the |
| the midpoint for each day. Now find the average | | | | trader to diversify and to trade many markets |
| midpoint for the 10 days. Let's call this AVERAGE | | | | simultaneously. |
| MIDPOINT. Next take 125 % of the AVERAGE | | | | 3) Finally the trading signal must be of such a nature |
| DAILY RANGE and add it to the AVERAGE | | | | that it can be tested in all kinds of markets and in all |
| MIDPOINT and that becomes our trading signal to | | | | kinds of market environments to establish its |
| buy tomorrow. | | | | accuracy and validity. |
| Thus we have created a signal using only two | | | | Used in this manner objective stock trading signals |
| parameters, AVERAGE DAILY RANGE and | | | | form the backbone of our trading system |
| AVERAGE MIDPOINT. | | | | development and become indispensable tools for |
| There are any numbers of ways to exit this trade, | | | | profitable stock trading. |
| but again we want to keep it simple and limit our | | | | |