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Timing Indicators, Timing Signals

A timing indicator is defined as any specific technique, whether fundamental or technical which objecВэtively indicates market entry, exit, or the underlying condition (i.e., bullВэish, bearish, neutral) of a given market or markets. A timing indicator can also be called a timing signal. I will use the terms interchangeably.

The definition given above is intentionally general for the specific purposes of this book. You will find, in later chapters, that literally thouВэsands of timing indicators may be used in many different ways. Timing indicators must be objective, that is, not subject to interpretation. An indiВэcator which is subject to interpretation is not an indicator, it is, rather, a technique and, therefore, subject to different interpretations by different traders and even by the same trader in different situations. I will make every effort in this book to differentiate among timing indicators, tradВэing techniques, and trading methods.

Trading Technique. A trading technique as opposed to a timing indicator, timing signal, or trading system is a fairly loose collection of procedures which assists traders in making decisions about market entry or exit. Frequently a trading technique consists of one or more timing indicators combined with general entry and exit rules and/or risk management procedures. A trading technique is, therefore, not a trading system but rather an approach to trading which is generally objective but not nearly as precise or rigid as is a trading system.

In practice, most traders follow techniques as opposed to systems. Much of what you will learn in this book relates specifically to trading techВэniques; however, I have also included some of my favorite trading sysВэtems. A trading system can be used as a trading technique if you wish. As I pointed out earlier, this is in fact what most day traders and most position traders actually do.

Market Entry and Exit. All traders should be familiar with these terms. Do not bother reading this definition if you are already familiar with these terms. Market entry means simply to establish a new long, short, or spread position. Market exit means to close out an existing long, short, or spread position. There are many different types of orders which may be used for entering and exiting markets. These are disВэcussed later on.

Optimization, Curve Fitting. The act of fitting a trading system to past data is called optimizing. When a trading system developer optiВэmizes a system, he or she does so in order to generate a set of system rules which have performed well on historical data. Although the sysВэtem appears to have worked well in the past, it is in fact "fitted" to the data. Hence, the system will frequently not perform well in the future. To a given extent, most system testing involves some degree of optiВэmization or curve fitting. Although opinions on curve fitting differ sharply among market experts, I caution you to avoid such systems.

These, then, are some of the very general terms which I will use throughout the course of this book. Terms not noted herein will be defined as they are introduced. Please note that my intent in redefining terms which you may already know is not to insult your intelligence but rather to make absolutely certain that we are communicating, since this is of paramount importance when teaching specific trading systems techniques and methods. Furthermore, many terms commonly used nowadays are not clearly understood by the individuals using them.