Here’s a short interview at the MoneyShow on the topic of choosing buy or sell signals in order to profit trading and reduce risk of loss. Click here to play video
Before risking any money in the markets, I want to know that I have a reasonable chance to profit trading. With that in mind while choosing technical indicators to give buy signals and sell signals, I first evaluate them by whether I think they will yield a profit trading. My preferred method is to backtest and then publish the results in BackTesting Report.
Trying to figure out whether it’s the buy signal or the sell signal which is the source of profit when trading brings a chicken-and-egg problem. Is the trading profit due to the buy signal or is the trading profit due to the sell signal? One way to sort this out is to first backtest the buy signals as independently as possible and then later backtest several sell signals using the buy signal that showed the most potential trading profit.
Backtesting Report does this by setting a timed exit, meaning that the strategy will sell after a given number of days. This is not meant for real trading, even if it does show a profit. It is simply to get an idea if the buy signal is any good.
Different types of traders favor different timeframes. To make the hunt for a good buy signal more realistic, BackTesting Report models three different types of traders and reports the win rate or percentage of profitable trades. A timed exit of:
- 200 days models an active investor who may hold a position for a year – potentially getting favorable capital gains treatment for trading profits.
- 20 days models a position trader who looks for trading profit after a few weeks in each trade.
- 2 days models a swing trader who looks for a quick trading profit almost immediately but is willing to hold a stock overnight if necessary to ride a profitable trade.
If you already know what timeframe you prefer you can just look at the results for that timeframe. I have also found it useful to compare win rates across different holding periods to help me decide which timeframe I want to target to maximize trading profit.
After picking a buy signal, then it is time to choose a sell signal. The BackTesting Reports compare several different exit strategies for the same buy signal to see which results in the best potential for trading profit. The main criterion for measuring potential for trading profit at this stage is expectancy. The different types of sell signals in BackTesting Report are in these categories:
- Timed – as discussed above
- Symmetric – often a mirror-image of the buy signal. For example if the buy signal is moving averages crossing upwards, the symmetric sell signal is moving averages crossing downwards.
- With stop losses – setting a fixed price to cut losses and sell. Another technique is a trailing stop loss which raises the stop price as stock price moves up and trading profit accumulates.
- With profit targets – picking a price or indicator configuration in advance to take profits
Here again it’s useful to look at the amount of time each strategy held a position and match it up to your needs. Of course, the main point is to choose a strategy with the highest potential for trading profit.
Along with backtesting results, it’s also a good idea to do forward testing to confirm the choice of buy signal and sell signal.
Of course there is more to learn about how to profit trading than just picking a buy and sell signal. You need to decide how to opportunities to trade and how to keep track of trading profits and losses, for example. Most important, is deciding how to manage risk to be sure to stay in the game and hang on to your trading profits!
For more info on technical indicators tested as buy signals and sell signals, see BackTestingReport.com