One of the most essential elements of any good trading strategy are the trading signals. These signals are generated using technical indicators and tell traders when they should enter or exit trades or make adjustments to them. You should choose an indicator based on the particular price pattern that you want to capture.
Here is a short overview of some of the most popular types of trading signals:
These trading signals are generated using indicators like RSI, Stochastics and DMS and either move from positive to negative or between a pair of fixed values. The major benefit of this signal is that they can accurately display reversals. However, these signals have a tendency to become stuck in oversold/overbought conditions for lengthy periods.
Crossing signals :
These are generated when two indicators such as DMS, Stochastics, MACD and MAs cross each other or when one of these indicators crosses the price. While these signals are easy to detect on the charts, there is also a tendency to display false trading signals if the market remains static.
Threshold signals :
These are generated when a technical indicator hits a certain value or when the price hits a certain level. The indicators that form these signals include RSI, Pivot Points, Stochastics, CCI as well as chart formation breakouts.
A line from an online guide on MTrading.in says “When two indicators become related, they can also be used as a signal. To illustrate, if the price is higher than a moving average, it may be interpreted as a signal that the price is in a long trend”. Hence, to make conditions more effective, they can be combined with other signals which also reduce the chances of a false signal. In addition, combining two signals can help confirm that market conditions are what you expect them to be before you make your trading decision.
Do you have a favorite indicator? Tell us about it below.