Simple Trading Systems
Indicator and Two Signal Lines System (I-2S System)
The simple trading system below is based on one technical indicator and two signal lines which are used to generate trading signals. Signal lines are 2 horizontal lines plotted on a technical indicator at a certain levels which are considered as a critical levels for generating signals. In technical analysis, traditional examples of indicators using two signal lines are Stochastics with one Signal Line at 80% and second Signal Line at 20% and RSI with signal lines at 30% and 70% levels.
The two signal lines are usually called as Upper Signal Line and Lower Signal Line. The principles of this simple trading system could be applied to any technical indicator. This system generates trading signals on an indicator and one of signal line crossovers.
- Rule #1: Go "Long" ("Buy") when an indicator raises above its Lower Signal Line Line after being below it.
- Rule #2: Go "Short" ("Sell Short") when an indicator drops below its Upper Signal Line after being above it.
- Rule #3: Go "Long" ("Buy") when the system is in the "Short" position and an indicator raises back above its Upper Signal Line.
- Rule #4: Go "Short" ("Sell Short") when the system is in the "Long" position and an indicator drops back below its Lower Signal Line.
Below you may see chart illustration of the first two rules of this simple trading system.
Chart 1: Rules #1 and #2 of the simple trading system:
The rules #3 and #4 in this simple trading system are set to protect the system from the situation when an analyzed stock moves against a signal after this signal was generated.
As an example, if an indicator drops below its upper signal line it would generate a "Sell" signal. However, after that, our stock could reverse up and our indicator may go up above its Upper Signal Line without even hitting the Lower Signal Line. In this case, the system would enter into the "Long" position again. Respectfully, the rule #4 is triggered when after a "Long" signal was generated (indicator raised above its Lower Signal Line) the indicator dropped back below its Lower Signal Line without even hitting its Upper Signal Line. In this case, the system goes back into the "Short" position.
On the charts #2 and #3 below you may see the illustration of the moments when rules #3 and #4 are triggered.
Chart 2: Rule #3 of the simple trading system:
Chart 3: Rule #4 of the simple trading system:
As was already mentioned above, in technical analysis, this system is mostly applied to Stochastics and RSI (Relative Strength Index) indicators. However, the same rules could be applied to other technical indicators which may not necessary oscillate between 0% and 100%. As an example, in our SBV (Selling/Buying Volume) tutorial we apply this simple system to SBV Oscillator which oscillates between -100% and +100%. At the same time, while technical analysis recommends 20/80 levels for Stochastics and 30/70 levels for RSI, results of our systems' scan reveal that it not always the best choice for all stocks.
We scan various indicators settings and signal line levels to find a best system's setting for a particular stock, indicator and time-frame. This simple trading system is based on four rules only and it is up to you, a trader, to customize it to your trading preferences - set additional rules and add additional indicators.
By V. K. for MarketVolume.com
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