To select a trading signal isn’t an easy job

How to select trading signals?
Trading signals are important for successful trading but too many of them will confuse you

By Guy Avtalyon

To select trading signals, your beliefs are the most important driver.  

You must have the right trading signals to guide you in the intensively competitive environments you will find in the stock market, futures, forex, and options markets.

The challenge is that it is not as simple as finding the best trading signal. Because just like everything else in your trading system, your signals should be based on your beliefs and your trading strategy.

If this is not the case you will have trouble pulling the trigger when you get a signal. 

Because of the way you enter and exit the market should be based on what you believe about your trading strategy and how the markets work.

How to select trading signals based on beliefs?

Your beliefs about the market are the most important determinant of your ideal trading system.

The first step to ensure you select a trading signal which matches your beliefs is to document your beliefs about trade setups, entry signals, exit signals, and initial stop losses.
Some traders believe that there is absolutely no value in using trial and error trying all different entry triggers / buy signals/sell signals hoping to find something that works.

According to such traders, trial and error in trading signal selection will result in a curve-fitted, worthless trading system. That can be true at some point.

The influence of trading signals

When you apply the trial and error method, you get a curve showing the past data. You can get a system that works fantastically well on past data but doesn’t work tomorrow or into the future.

Maybe, for that reason, it is better to start with your beliefs and your trading strategy and select trading signals that support these to reduce your chance of curve fitting.

When you change your approach you can found enormous benefits which included:

  • Greater clarity on objectives
  • Reduced need for optimization
  • Greater real-time profitability
  • Reduced development time
  • Simplified system design

To be clear.

The internet is a wonderful tool, but the vast amount of information and companies/people dispensing forex trading signals and advice can be daunting and confusing to newer traders.

Advanced traders already can recognize what constitutes quality versus hype.

Forex signal services

No one forex signal service will ever meet the needs of all traders, but a good service must.

Few trading services post their performance. There are several reasons for this:

The performance is simply not worth showing as it does little to motivate.
The raw data, no matter how robust, falls on deaf ears.

The first consideration is that looking for a trading signal that generates a profitable trade on its own is nonsensical. You may get the best entry signal ever created. It will be useless unless you adopt this rule as part of your trading system. Also, you’ll need all of the required components working together. Otherwise, there is no way you will make money in the long run.

A complete trading system needs each of the following:

Objectives
Setup
Entry trigger
Initial stop loss
Exits

Money management and Position size rules

The trade entry trigger is just one part of the complete system.

Many people also suggest that it is the least important part of the system. Entry triggers are the area most prone to curve fitting, over-optimization, and random noise in the market.

Actually, how you exit a trade once you are in determines how much profit you make from it.

Remember, simple is better than complex. Fewer rules is better than more rules. Complex trading systems with many rules may not perform well in the future.

Well, it is more difficult to warp fit a simple system with several rules to past data. Hence, if you have many rules and complex manipulations you can easily fit your system to the past data. This will perform it largely useless in the future!

One trader told us: ”Use simple trading signals that fit your trading strategy and beliefs”. That helps a lot.

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