Why Don’t My Trading Signals Work
Technical analysis, the scientific study of financial markets using lines, indicators, averages and signals. To read the pros you’d think all you have to do to be profitable is learn to read the indicators and the charts and use what you read to make trades. Putting it into practice is not so easy. All too often a trade that should have been a winner isn’t, a movement that should have come doesn’t and signals repeatedly fail to produce the results that the books and pros told would happen.
What many new traders fail to take to heart, and I can count myself as one of them because it took me a long time to figure this out, is that the market is moving in totally random directions for at least 90% of the time. This is because most of the time the market is not engaged with the asset, there is no active buying and selling. What happens is a few buyers may push prices up, or sellers may quit selling and prices may rise slightly, or buyers dry up and prices may fall slightly or a few sellers may enter the market and push prices lower or, what is more likely, a combination of these small moves will occur one after another with no rhyme or reason and the lower the time frame you use the worse it gets.
The thing that is missing from the equation, the reasons the signals aren’t working, is because there is no volume behind the move. Volume is the number of people, shares, lots or ticks that drive a move. It is easiest to track with equities because there are a set number of shares of a stock, the shares on traded in limited places and they are carefully tracked by the exchanges, the SEC and the traders themselves. Commodities are a little harder to track based on volume but there is still data to be had. The number of lots sold on a given day relative to the total available is only one.
Forex is the hardest to track but still not impossible. It’s hardest because currency is exchanged around the clock, nearly 24/7, on exchanges around the world, digitally and through spot positions such as the FX market. In order to track volume the best thing to do is count the number of ticks in a minute, an hour or a day. The ticks will tell you how many transactions occurred, up and down, in that time period and will give you a reading that you can compare to past sessions.
There are some indicators to help with volume analysis that I have introduced before. These include On-Balance-Volume, the Volume Oscillator and the Force Index. Each can provide general signals within the market and to verify signals derived with other methods. What I suggest is learning patience and that is the hardest thing for a trader to do because lets face it, a trader wants to trade. Learning patience means waiting for volume to pick up before entering a market. You can trade on a low volume day but what’s the point if the signals are wishy-washy, you keep losing and getting frustrated. The best thing to do is wait for a day when prices are active, traders are trading and the market is engaged. This means, in many cases, trading the news, or at least waiting for news to come out and the trading the wave of buying or selling it causes.
The bottom line is that in order to get the best signals, the final rule in your strategy to ensure you weed out the false signals, is to require some form of volume control. With equities and indices daily volume is tracked, as well as an average daily volume or average hourly volume, whatever your chart is set to. When volume is rising above average you can rest assured that the market is engaging with asset prices and that the signals generated will be more reliable. The higher above average daily volume becomes the better the signal until the market is fully engaged and the signals are virtually fool proof. If the indicators I suggest don’t appeal to you there is one foolproof way to tell if today is a good day to trade.. is the market active, or is it listless? What I mean to say, is there reason for the market to be exited today or is just one more day for losers to throw money at the market?