How to trade with algorithmic signals

I am going to discuss here, the basics and correct procedure to follow when you have buy/sell signals software to assist you in trading, many people’s will have this question, whether you use Windicator signals or any other algorithms the procedure is same, it draws little similarity from indicator based trading, like RSI, MACD etc, in that information produced by these signal only makes up for a part of trading opportunity that may they are just one input and finally what to do is decided entirely by trader.

Unfortunately when trading with signals, many people tend to think that, the
signals are trading decisions on their own, which is not valid concept. These peoples then make losses and end up believing that, algorithmic trading is unworkable, or there must be utopian self driven algorithm out there, only when you have that, it can be make profit. Nothing is far from truth but this. By believing like this you are depriving yourself from the leverage and edge a computer assisted trading can give you, computers have helped and improved our efficiency in every fields, and trading is not an exception.

First ask a question to yourself, if there exist such a algorithm able to profit on it’s own, what will be the use of human traders? Those algorithms can be run by mom/dad, your neighbor buddy etc and they will generate huge profit without doing anything not knowing single thing about market. This sounds impossible right? Why I given this example is to never underestimate your role as a trader, no matter what kind of signal system you have, role of a trader is always above everything else.

In the following passage I am going to describe common tactics that can be used to improve trading with a mechanical system. Remember you may choose to run trading in a complete automated environment, but again it must have parameters configured for that manually.

In a nutshell, once you have decided to trade a certain stock, for rest of the day you must fix the trading style ( Long only, Short only or both) and second, assign the correct type of strategy. Remember these steps are done manually and no algorithm exist for that 🙂

Figure out the market sentiment

This is the most important thing, being right or wrong here will dictate profit statement end of the day. Here you need to figure out the market phase, this can be done by by looking higher timeframe charts (like Daily charts), find out whether they are in down-trending, up-trending or consolidation phase, also you need to check for important levels. Based on these realization you are going to fix trade style and strategy.

Take for example, you have a daily chart of ABC stock, find out market is making consecutive higher or lower peaks/valley, you will need to add least add following indicators, Bollinger band (20) , MA10, MA20, MA50, MA200, now if stocks approaches any of these levels one has to be careful and change the signal type from trending to reversal. Let me explain a bit more that.

There can be infinite number of algorithms, but all of them fall in either of, trending or reversal category. A trend signal is one which gives trade alerts in the same direction of prevailing trend, it may give a signal on first impulsive move or upon pullbacks that’s the algo implementation thing, but both will be in the direction of major trend. A reversal signals on the other hand, works opposite of this, they typically give signal against the prevailing trend, it’s philosophy is, any trending move, however strong, sooner or later going to fade, so attempt is to time that perfectly.

When your market is up trending you should use trend signals and in only Long
mode, this will allow you to enter at every pull back. Whereas if the market
is ranging or reaching to a crucial support resistance you switch to
reversal signals.