Triggering Your Trading Signal by Benjamin L. Cotton
Here’s an indicator that calculates the future price movement necessary to trigger a moving average condition, removing the guesswork from systems trading based on such relationships.
Every trader has indicators to track the market with, but if the indicators are dependent upon a price that has yet to occur, the patience and time needed to track the entire body of stocks of concern to us can be tedious. There’s a way to get directly to what you want to know, which is what price will trip the indicators to generate a signal.
For example, a simple moving average crossover rule states: “If the close crosses over the 30-day moving average of the close, then buy on close.” Here, the two variables — the close and the 30-day moving average — converge to generate a signal. In this case, however, both variables depend on a closing price that has yet to occur. If you’re going to trade this rule, it is risky to anticipate the exact price necessary for a signal to be triggered, especially if the relationship were more complicated — say, buy on close when a five-day moving average crosses over a 10-day moving average. An indicator that computes this target price, or “bogie” in Air Force parlance, makes determining the trigger much easier. Certainly, it beats plugging a best-guess price into your calculator repeatedly until a trade is simulated.