Ideal Entry Points Technical Indicators
Using technical indicators and signal filters, you can build a strong, methodical approach to timing market entries by defining clear rules for opening your positions.
When you look at signals from technical indicators, many traders naturally find themselves in a bind, with negative emotions or greed taking over as they decide whether to enter a new trade. Traders who are extremely conservative and completely risk-averse may end up sitting on their hands, waiting for multiple layers of confirmation before entering a single position, while missing many other, more profitable opportunities. This practice usually leads to missing trades entirely.
On the other hand, eager traders may jump at any chance to enter the market, sometimes for no good reason beyond the urge to trade. This, of course, often leads to losing trades and lost capital. For every trader, whether very conservative, very eager, or somewhere in between, I recommend using the different signals from technical indicators together with a range of signal filters to build clearer, more deliberate entry points for your trades.
Technical Indicators and Signal Filters in Forex Trading
Technical indicators combined with signal filters set the trade-filtering conditions and define entry points more precisely. This is one of the most important setup conditions that comes before entering a trade, so it must happen before the trade begins. You can think of trade filters as a safety catch that arms the trade.
Once all the trade-filter conditions are met, the safety is switched off and the entry point becomes active. Trade filters can include a variety of factors, ranging from the time of day to the location of price. For example, the trade filters for the chart in the figure above include the following:
- The time between 9:30 AM and 1:00 PM US Eastern time
- The price bar closed below the 20- and 50-period moving averages
- The 20-period moving average (in blue) is below the 50-period moving average (in red)
- The filter signal fully agrees with the signal and entry points from the technical indicators
All of these trade-filter conditions become true on the 9:30 bar, which provides the setup to activate the trade. Trade filters also define the ideal market conditions for the technical indicator signals to trade in. These filters are often built through observation and back-testing.
Read also: What Is the Pivot Point Indicator?
Entry Points | A Practical Example of Signal Filters
For example, a trader may have developed a strategy that works well in the morning but does not perform as well in the afternoon. The trader can then use a time filter to limit trade entries to a specific window; in this case, between 9:30 AM and 1:00 PM US Eastern time.
The technical indicators in the chart above show the important considerations in choosing trade filters and not restricting the degrees of freedom in your trading plan. In other words, having too many filters can create a trade setup that is statistically improbable and rarely true. That severely limits how strong and profitable a trading strategy can be. This is the situation the conservative trader ends up in, where most trading opportunities are essentially filtered out.
Always remember that ideal entry points come from clear technical signals confirmed by a signal filter.
Read also: How to Calculate the Number of Pips in Forex Trades in Detail
Why Traders Over-Filter Their Strategies
One reason traders over-filter their trading strategies is that they try to eliminate every losing trade after running a historical back-test. Back-testing refers to testing a trading plan or idea on historical data to see whether the idea could be profitable in real trading.
Finally, while back-testing is a valuable tool for developing profitable systems, it can be misused, especially when traders try to find ways to avoid every losing trade, which is impossible in the forex market. Forex is a form of volatile fluctuation, and over-tuning trading conditions to get the best performance on historical data creates an unrealistic system that performs poorly in real trading. When setting trade filters, traders should aim to create filters that help the system as a whole, not just one or two particular trades.
Traders use technical indicators to gain insight into the supply and demand for securities and into market movements.
Together, technical indicators form the basis of technical analysis and provide metrics such as trading volume, along with clues about whether a price move will continue. In this way, technical indicators can be used to generate buy and sell signals and help you make better trading decisions.
That covers the most notable things to know about entry points in the forex trading market.
Read also: Best Indicators for Scalping
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Disclaimer: This article is for educational purposes only and is not investment advice. Trading forex and CFDs carries a high level of risk to your capital because of leverage, and you can lose more than your initial deposit. Back-tested results and past performance do not guarantee future outcomes. Some links on this site may be affiliate links, meaning we may earn a commission at no extra cost to you. Always do your own research and consider consulting a licensed financial advisor before trading.
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