Trader Tip: Reading False Triggers with Filters Often traders focus on what we call the Trigger. In other words, what causes you to take a market position. But one should also focus on, what causes you NOT to take a market position. This is what we call in our Trader Trade Plan framework, the Filter.
So with this, let’s take a look at the attached thumbnail chart. Look at the point in the market time-series where the arrow asks the question, should we Trigger at the moving average (MA) crossover to make a Long entry? At the point of the Trigger, one is not sure whether the market is ready to go back up after the recent decline. Obviously from this graphic chart, the answer was no. Great hindsight reading. But the question begs, why? Why should this Long entry have be avoided? Here are the arguments to avoid this entry as part of your Filter:
- MA crossovers: First off, MA crossover Trade Plans rarely work. It is always a question of chop vs. trend. In short, as validated with many algo back testings, it is a net loser Trade Plan. This indicator alone means nothing.
- Rising wedges: In general, rising/falling wedges indicate that the market will break in the direction of the wedge. But this is only true when the MA is moving in this same direction as the wedge would indicate (at the start of the wedge). In this case, it did not.
- Slope: Since the prevailing MA is pointing down, to reverse this, one would need to see a market reversal pattern. Wedges are not a reversal pattern, rather a continuation pattern. The Slope, or the angle of attack to reverse upward is quite low, indicating that buyers are lethargic and are not eager to start a new buying frenzy. See the link below on market Slope.
- Market events: All the above may be true, except in the case of an imminent news announcement that could cause an unexpected spike in either direction. If this is the case, then yet another reason to avoid the entry.
So give this a think and see if you can apply this idea to your Trade Plan Filters. Click here, or watch below a video presentation of this Trader Tip.
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