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Trading signals |
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What is a trading signal ? A trading signal is a input to the trader when to trade in the market.
A trading signal can originate from various sources, such as indicators, chart patterns, news etc. If for example the price of a stock crosses above its 50 day price moving average, this could be a signal to buy (go long) the stock.
However, a signal alone is not enough.
As the word signal says, it is telling you to do something. You can follow a signal, or not.
In order to program a computer, we need more than just a signal. We need to differ between a signal (the initial input) and the execution of the signal (the outcome of the input).
When a signal is given by a trading system, the signal has to be
If we for example trade with end of day data, we face the delay of at least half a day - From the close to the next open of the market.
When a trading system is applied to end of day data, it will calculate to the latest possible data available - the latest close price available. The next buy price, is however, away to the next day - or even couple days, if a weekend is in between.
Since during off trade hours, the world still is turning, we are most likely facing a different open price to the last close price.
Exactly this little price difference, some time big difference, can harm trading systems. Its called slippage - The difference between the signal price and the actual executed price.
In order to take this into account when testing trading systems, we need more then just a simple buy and sell signal.
Below is an overview table about all possible signals and execution terms for both long and short trading.
Long trading Long signals Open Long Buy Signal = OLBS Hold Long Position Signal = HLPS Close Long Sell Signal = CLSS Avoid Long Position Signal = ALPS
Long execution signals Open Long Buy Execution = OLBE Hold Long Position Execution = HLPE Close Long Sell Execution = CLSE Avoid Long Position Execution = ALPE
Short trading Short Signals Open Short Sell Signal = OSSS Hold Short Position Signal = HSPS Close Short Buy Signal = CSBS Avoid Short Position Signal = ASPS
Short execution signals Open Short Sell Execution = OSSE Hold Short Position Execution = HSPE Close Short Buy Execution = CSBE Avoid Short Position Execution = ASPE
This detailed labeling of signal terms is an absolute must, when programming trading software and testing systems.
Some trading software just „forget“ about the gap between signal and execution. Mostly, such approaches will work in testing time frames, but fail in real world.
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