A friend who trades asked me: Liang Ge, the book says to trade on moving average crossovers, I have executed several trades, but I've been wrong a few times and not making any money. Why is that?
Actually, it's not just moving average crossovers; impulsively entering when you see candlesticks breaking highs or bullish divergences usually does not end well.
Because what has been mentioned above is just the technical standards of indicators, not a complete trading signal.
As mature traders, we should have a complete, executable, and reviewable trading signal system. Today, I will directly share six core elements of a complete trading signal, which you can use to assess whether your trading signals are worth entering.
Additionally, based on today's content, I have summarized a (trading signal evaluation form) to help you filter high-quality trading signals. If you need it, feel free to message me.
1. Has direction (trend structure)
When a candlestick chart is in front of you, what is the first thing you do? You must determine the current direction of the market: is it going up, going down, or is it in a sideways consolidation?
The moving average crossover signal mentioned at the beginning of the article only has a success rate when in line with the trend. If you keep waiting for golden crosses to go long in a clearly rising market, you will definitely profit; but if you keep shorting with dead crosses, you will surely lose.
All technical indicators have this characteristic: the trend must be right for a high success rate to be possible; otherwise, the patterns will fail.
2. Has reason (entry logic)
What is the reason for entering the market? Even if the direction is clear, you can't just jump in; there should be a specific reason, such as the appearance of a reversal candlestick pattern or a breakout in a smaller timeframe. Only then does it mean the trade can be replicated. You can't vaguely say today's market is bullish and just act randomly; profit must not rely on luck, that's unreasonable.
The most common entry logic, besides the two mentioned above, includes breakout patterns from consolidations, such as triangle consolidations, entering when candlesticks close above moving averages, or moving average crossovers, indicator resonance, MACD bottom-top divergence + candlestick reversal, etc.
3. Has position (cost-effectiveness)
In trading, we must consider cost-effectiveness; input and output must be reasonable. Choosing the right entry position is crucial. For instance, in a clear bullish trend, entering directly at a high price with a large stop-loss space results in a poor risk-reward ratio. However, waiting for the market to pull back to support and form a reversal signal before entering provides a better entry price and smaller stop-loss space, increasing the cost-effectiveness of the signal.
A good signal must consider: Is the stop-loss space reasonable? Can you bear the risk of this trade? Is the expected profit target greater than 2:1?
Without cost-effectiveness and signals that do not consider risk, it's like driving a car without brakes; an accident will eventually happen.
4. Is it easy to execute? (signal clarity)
When a chart is in front of you, can you make a trading decision within five minutes? Should you enter? If a signal requires too many technical standards to reference or has too many ambiguous areas, causing indecision about whether it's a false breakout or if you should wait for a deeper pullback to enter, this signal is problematic.
Clear signals allow you to 'make a decision at a glance'; you will definitely not hesitate for half an hour before entering.
5. Has it appeared repeatedly and can be validated?
Whether the entry signal is based on candlestick patterns or indicator parameters, we need to consider if it repeatedly appears during backtesting. If a signal only appears once in six months, it cannot be traded repeatedly, which renders it meaningless in practice.
Additionally, has this signal been validated through backtesting, and can it represent a certain type of market movement with historical data, possessing advantages in success rate and risk-reward ratio?
The effectiveness of a signal and the rationality of its repetition frequency are key factors determining the quality of a signal.
6. Is it consistent with your trading system?
Maintaining consistency in trading operations and adhering to your trading system to achieve long-term profitability is fundamental to improving trading signals.
But if you randomly take signals during trading, it is not part of your trading system. Your system is to enter on pullbacks, but if you see a market breakout and rush in, guessing tops and bottoms as the market moves in one direction, even if you profit, it will be temporary. A complete trading signal comes from your own trading system, not from arbitrary assumptions.
Many people might think it is simple to trade. Why do we need to consider so many issues?
First of all, trading seems close to money, seemingly within reach, but in reality, it's far away. Things without barriers are often the hardest to do. If we set our baseline higher from the beginning, we can avoid emotional trading later on.
Don't underestimate these few elements; they can help you save a lot of money. I believe those who have walked the trading path deeply resonate with this.
Furthermore, when you start trading, never get carried away; don't go all-in with heavy positions just because you see a good opportunity. Start with small positions to practice, and once you can easily identify a high-quality signal and develop good trading habits, then you can unleash your skills.
