Filtering signals with minimal rules is fairly easy but the trader needs to know reversal bars and what overbought and oversold areas are. I don’t believe anyone should take signals blindly. However, even minimal rules can avoid losses.
Filtering Signals with Minimal Rules
For new traders, following rules is challenging, which is why these are minimal — to get the trader into a pattern of following rules. Very simple rules:
- When a signal comes out the market must be either overbought (for selling) or oversold (for buying)
- Reversal bar must form
While I generally will enter OTM, if the market is moving really slow, I either buy time or I opt to do an ATM. It’s a trader’s risk tolerance that determines how they trade it.
This morning is a great example of a trade that I would not take because it doesn’t meet the criteria above (aka filtering signals). The signal was on the YMH17 to sell. First, is the Stochastics in Nadex overbought? No. Second, is there a reversal bar to the downside? No. In fact, there is a reversal bar to the upside at the moment, which would go against the trade.
And what happens? The market moves up. Even though the Stochastics is registering overbought now, where is the reversal bar? There isn’t one. Price is now almost 2 strikes away from the signal so I’m not interested in it anymore as the market is not doing as I anticipated. Move on to the next signal.
Now let’s look at one that meets all the criteria.
Here is the entry chart:
Notice the rules are adhered to — Stochastics is overbought and there is a reversal bar forming. I went down to a 15 minute to confirm that the bar was a reversal to lower risk instead of waiting an additional 30 minutes. I also noticed there was trend divergence on the 15 that should also push price in my direction. Risk on entry was about $48 per contract.
While I was in the short trade a signal came in to buy the AUDUSD at .7509 (dotted line across the chart). However, with the power of the 60 minute pushing price and no sign of a reversal, by filtering signals, I opted to bypass it. Price pushed lower and I took profits (there was only $7.50 left in profits per contract but another 3 hours and 50 minutes till expiration).