Trader Risk Profiling and Position Analysis
Price based triggers are price penetrations of:■ (^) Previous support and resistance levels
■ (^) Overlay indicators such as moving averages, trendlines, channels, fixed per-
centage and volatility bands, Fibonacci and Gann levels, fan lines, Ichimoku
clouds, Floor Trader’s Pivot Points, and so on
■ (^) Some form of algorithmically derived price level based on a particular
sequence or counting of bars, candlesticks, boxes, lines, or bricks (e.g.,
Guppy’s Count Back Lines, Two Bar Breakouts, Fibonacci and Lucas Bar
Counts, etc.)
Though not usually recommended, non‐price based events, penetrations, or
violations are sometimes used as a trigger to initiate a trade, and these include:
■ (^) Oscillator signal line crossovers
■ (^) Oscillator zero level crossovers (for unbounded oscillators)
■ (^) Oscillator 50 percent level crossovers (for bounded oscillators)
■ (^) Oscillator chart pattern violations
■ (^) Oscillator overbought/oversold (OBOS) level tests or breaches
■ (^) Oscillator overlay tests or breaches (e.g., RSI breaching its own Bollinger
Band)
Though some market participants actually use these non‐price based events as
triggers, they are usually regarded as merely signals.
One of the biggest disadvantages of using non‐price based triggers is most
evident when there is a significant amount of divergence between price and an
oscillator or indicator, or between various oscillators and indicators. Standard di-
vergence will usually misdirect the trader or automated trading programs into be-
lieving that the trend is reversing when it may actually still be intact. Conversely,
reverse divergence may indicate that a trend is in continuation, when in reality it
may already be reversing.
Therefore:
Directional change is best confirmed using price itself.
Finally, all price‐based triggers are considered confirmation of a certain price
trend or reaction, whereas signals only indicate potential future price action.
26.5.2 signals
A signal merely indicates potential bullishness or bearishness in the market. It
does not indicate whether price itself is actually reversing or otherwise. Signals
represent a certain precondition or setup that alerts the market participants to
a potential penetration of a specific price trigger, in anticipation of a reversal or
breakout.
Signals may also be based on some form of overextension or exhaustion
between price action, oscillators, and overlays.