Advantage: Fact Based Triggers
I was recently asked, “What sets apart a winning trading method from one that’s a waste of time and money?”
My answer was, “How much time do you have on your hands?”
The first thing that comes to mind in qualifying a method is does it use fact based triggers? Ask other educators if they use “fact based triggers” and it’s likely you’ll get a blank look, because many don’t know whether they do or don’t. Yet without them you cannot rely on the data from your back-tests to be replicated in your demo trading. A “fact based trigger” is when specific conditions are fulfilled on the “close” of one or more trading time periods, or candles. “Fact based” in this case means time specific. An example would be if you were told to buy a market once its price moved above a certain level, as opposed to being told to buy it once price “closed” above a certain level on a daily basis. The difference is the second trigger is “fact based” because you added the time specific condition of “waiting for the candle to close above that level on a daily basis”, rather than waiting for price to first “move above that level”. It’s similar with a moving average cross. It’s completely different to say “use a moving average cross as a buy trigger the next time it crosses up”, compared to saying, “use a moving average cross as a buy trigger if it occurs on the close of the 4-hour candle”. Over the course of the 4-hour candle the moving average can cross and uncross several times, but it would only be a fact based occurrence if it had changed direction on the “close of the candle”. It’s extremely important to know whether you are using fact based triggers because they will prove more reliable in back-testing, and then in your demo trading. To back-test a non-time sensitive trigger is unreliable because you cannot account for price activity “within” a time period as easily as you can after the time period is closed out. The only definitive information we have to work with is price’s open, high, low and close. If you take away that “closing” element you take away a key variable and your data becomes unreliable.
A fact based trigger can further be defined in the methodology which we teach at Trading-U.com as an occurrence, or set of occurrences, which marks a change in price direction for a market at a specific time. This is an important concept in considering a trading methodology. Our trigger is valuable to us because it defines that place in price and time where a change of direction occurred. Because this point can be measured, and back-tested, it becomes helpful in demonstrating the validity of the method over time. Without being able to quantify a method you will never develop the belief and confidence to stick to your trading plan. For us that process starts with fact based triggers.
Jay Norris is the author of Mastering the Currency Market, McGraw-Hill, 2009 and a Trading Instructor at Trading-U.com. To see details of Trading-U’s available course work go to Trading Course
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. Risks include the potential that changing political/economic conditions may substantially affect the price/liquidity of a currency. Investors may lose all or more than their original investments.
Fact Based Triggers for me….No problem there