(IBTimes) - One of the biggest problems we see from traders
wanting to improve their performance is they are not using fact
based triggers, and they don't' know it. A "fact based trigger"
is when price "closes" above a specific level, and not just moves
above it. Another example would be if you use a moving average
for your trigger/signal. It's very different to say "buy when the
green line moves above the red line" then it would be to say "if
the green line is above the red line on the close of the candle,
then buy". It would be the same effect with a momentum indicator.
Taking a trade trigger when an indicator such as a MACD crosses
is different than taking a signal once the MACD has crossed on a
closing candle basis. This "closing basis" is critical because
when you look back in time at a chart you are looking at closed
candles only; i.e.: fact based signals only. Every candle on the
chart other than the current one is closed. There is no way to
see how often moving averages and other indicators crossed back
and forth, or in programmer jargon "re-painted" before the close
of an individual candle. For example using a 4-hour candle the
moving average can cross and uncross -- give a signal, take away
a signal -- several times, while a MACD screen shot of the same
market 2-hours into the candle can look completely different. If
you do not account for that "closing" element you take away a key
variable and your future performance is less likely to match
you're back-tested results. Your forward tests will have false
signals, a.k.a. "repaints".
The fact based signal to avoid repaints is an important
concept in considering a trading methodology. If you aren't using
a closing candle signal you cannot measure if your tactic gave
signals before the close of the candle, so you're trading results
when taking a non-closing candle signal will be different than
your closed candle back-test. Without closed candle signals, i.e.
fact based triggers, you won't be able to quantify your method,
and will have trouble developing the confidence to stick to your
trading plan.
To see Jay live online tomorrow on FXStreet.com and
demonstrate a fact -based trigger go to:
Live Market Webinar
Jay Norris
is the Director of Forex Learning at
IBUniversity.com
and author of Mastering the Currency Market, McGraw-Hill, 2009
and Mastering Trade Selection and Management, McGraw-Hill,
2011.
DISCLAIMER: Trading involves substantial risk of loss and
is not suitable for every investor!
Original Source:
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