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.
To find the best signals you need to first look at yourself
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.
The best trading signals are the ones which are consistent with your beliefs about what you are trying to achieve
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 maybe something like:
- Parabolic SAR
- Directional movement indicator
- Moving average crossover
- Or one of several other indicators that perform similar functions
The best signal in this case probably wouldn’t be any of the following:
- Channel breakout
- Volatility breakout
- Narrow range day
- Bollinger bands
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.
Documenting your beliefs about each part of your system reduces development time and gives you a better end result
3 Simple Steps To Find The Best Trading Signals
- Document your beliefs about each component of your trading system
- Determine which trading signals match your beliefs for each component
- Objectively test each potential signal from step 2 in the context of your entire system to find the best combination of trading signals for your trading system
Example Of How To Use These 3 Steps…
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…
- Setup: …trending markets are likely to continue trending
- Entry: …entry after a pullback is a low risk, high probability entry point
- Exit: …letting trades have plenty of room to move allows me to capture big winners
- Initial stops: …higher volatility instruments have more noise and therefore need wider initial stop losses to ensure trades aren’t exited prematurely at a loss
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:
Instrument made a new 100 day high in the last 5 days; OR
50 day moving average is above the 200 day moving average; OR
Price is 10 ATR higher than it was 2 months ago…
Positive directional movement indicator crosses above negative directional movement indicator; OR
Short term moving average crosses above the medium term moving average; OR
Price crosses above the parabolic SAR indicator…
100 day low channel breakout; OR
Chandelier exit; OR
Price crosses below the 200 day moving average …
- Initial stops:
Lowest low of the last 10 days; OR
Yesterday’s close minus three times the average true range; OR
Yesterday’s close minus 1 standard deviation of daily price movements…
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.
Test Trading Signals As a System – Not Individually
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.
All components of a trading system interact – They should be tested as a system, not as individual components
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!!
Conclusion on The Best Trading Signals:
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.
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:
- What does average true range mean?
- What is a chandelier exit?
- What is a channel breakout?
- How do I calculate the positive directional movement?
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 want to finally start trading profitably is to join The Trader Success System so you can Launch your own trading system in 6 weeks or less!
My last 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 MAGIC BULLET TRADING SIGNAL DOES NOT EXIST!
(Trust me on this – I have looked)
Thanks Adrian. Timely advice that helps with the ESTC
I am glad you found the post helpful! When you are creating your own trading systems are you are in the Enlightened Stock Trader Certification LIVE program this sort of info is really useful. Well done – keep up the great work.