Trading Signals Criteria

This short article explains the selection criterion behind Trading Signals which also applies to the Stock Monitor tool with one exception; stock monitor fires on any trading signal that is generated not just when the aggregate criterion is greater than 80 percent. Every day, there are numerous buy, short sell, and exit signals provided for the Trading Signals service. To better use the service, it is important to understand the logic regarding how the signals are generated.

The service was originally based on L.A. Little's book Trend Qualifications and Trading (published by John Wiley & Sons). In this ground-breaking book, L.A. examines the definition of trend and proposes an improved definition. He then sets about to define how to qualify trend and how to better time entry and exits based on anchor bars which create anchor zones. Since then, L.A. extended this work to focus on not just finding trades but finding the trades that have the potential for greatness. This was detailed in his third book, Trend Trading Set-Ups and in the second iteration of the programs, L.A. boiled all trades down into two fundamental types - breakouts and retraces. All other trades stem from one of these two types. He then looked for the common characteristics that made breakout and retrace trades potentially great. The outcome of that work was a decision criterion matrix - 9 for Retrace Trades, 10 for Breakout Trades. If a trade setup meets roughly 80% or more of these criterion it has the potential for greatness. Thus, in the case of retrace trades 7 of the 9 criterion need to be met to create a trading signal and 8 out of 10 for a breakout. The one caveat is that sometimes one of the criterion doesn't apply because the stock is a new issue or the trading signal is on a longer time frame. In those cases you may see a breakout signal issues with 7 of 9 criterion met where the one criterion that doesn't apply is subtracted from the mix.

Trading Signals is a programmatic implementation of L.A.'s ideas about how better to time stock entry and exit. With the idea that it is better to scale into and out of positions rather than to buy and sell an entire position at once, Trading Signals identifies those places on a chart where a stock should be scaled into or out of.

Each generated signal represents a potential buy or sell signal but whether it is acted upon and to what degree is interpretive and requires a decision by you, the trader. Signals are examined for all time frames, from short to long term (daily, weekly, monthly charts). Stock Monitor is an alternate offering that lets you receive trading signals across all time frames independent of them meeting a set number of Criterion but instead if any criterion are met.

 

Trading Signal Rules

The rules for generating a trading signal have a generic component and a specific component that is dependent on the signal being generated. Both are defined below.

 

General Components

1. Only stocks with an average trading volume of 30,000 shares per day have signals issued for them. Any stocks with an average daily volume that is less than 30,000 shares is ignored. We do list these stocks in our TA Charts, Trading Cube, etc., but do not generate signals for them.

2. Stocks that trade at $2 or less are ignored. We do not trade penny stocks and this is our cutoff criterion. We do list these stocks in our TA Charts, Trading Cube, etc., but do not generate signals for them.

3. Currently ETFs and Funds are listed as long as they meet the above criterion.

4. These signals cover all stocks in our database.

 

Specific Components

1. For Retrace Trades, the following checklist is examined for each listed symbol and for the short and intermediate term time frames. If 80% of the criterion are met, then a trading signal is issued.

 

Retrace Trade Criterion
CriterionExplanation
Bullish Retrace
For this signal to trigger, 80% of the following criterion must be met for Trading Signals:
  • General market is aligned (bullish or sideways) for the same time frame and is not extended.
  • General market is aligned (bullish or sideways) for the next higher time frame and is not extended.
  • Sector that the symbol trades in is aligned (bullish or sideways) for the same time frame and is not extended.
  • Sector that the symbol trades in is aligned (bullish or sideways) for the next higher time frame and is not extended.
  • Trend for the symbol being examined is not extended for the current time frame
  • Trend for the symbol being examined is not extended for the next higher time frame
  • Complimentary retest and regenerate signals across multiple time frames
  • Light volume retest on the retest and regenerate sequence
  • Confirmed versus suspect breakout
Bearish Retrace
For this signal to trigger, 80% of the following criterion must be met for Trading Signals:
  • General market is aligned (bearish or sideways) for the same time frame and is not extended.
  • General market is aligned (bearish or sideways) for the next higher time frame and is not extended.
  • Sector that the symbol trades in is aligned (bearish or sideways) for the same time frame and is not extended.
  • Sector that the symbol trades in is aligned (bearish or sideways) for the next higher time frame and is not extended.
  • Trend for the symbol being examined is not extended for the current time frame
  • Trend for the symbol being examined is not extended for the next higher time frame
  • Complimentary retest and regenerate signals across multiple time frames
  • Light volume retest on the retest and regenerate sequence
  • Confirmed versus suspect breakout
Potential Bullish Retrace
For this signal to trigger, the current price point must be within one bars ATR of triggering a Bullish Retrace AND 80% of the following criterion must be met for Trading Signals:
  • General market is aligned (bullish or sideways) for the same time frame and is not extended.
  • General market is aligned (bullish or sideways) for the next higher time frame and is not extended.
  • Sector that the symbol trades in is aligned (bullish or sideways) for the same time frame and is not extended.
  • Sector that the symbol trades in is aligned (bullish or sideways) for the next higher time frame and is not extended.
  • Trend for the symbol being examined is not extended for the current time frame
  • Trend for the symbol being examined is not extended for the next higher time frame
  • Complimentary retest and regenerate signals across multiple time frames
  • Light volume retest on the retest and regenerate sequence
  • Confirmed versus suspect breakout
Potential Bearish Retrace
For this signal to trigger, the current price point must be within one bars ATR of triggering a Bearish Retrace AND 80% of the following criterion must be met for Trading Signals:
  • General market is aligned (bearish or sideways) for the same time frame and is not extended.
  • General market is aligned (bearish or sideways) for the next higher time frame and is not extended.
  • Sector that the symbol trades in is aligned (bearish or sideways) for the same time frame and is not extended.
  • Sector that the symbol trades in is aligned (bearish or sideways) for the next higher time frame and is not extended.
  • Trend for the symbol being examined is not extended for the current time frame
  • Trend for the symbol being examined is not extended for the next higher time frame
  • Complimentary retest and regenerate signals across multiple time frames
  • Light volume retest on the retest and regenerate sequence
  • Confirmed versus suspect breakout

 

 

2. For Breakout Trades, the following checklist is examined for each listed symbol and for the short and intermediate term time frames. If 80% of the criterion are met, then a trading signal is issued.

 

Breakout Trade Criterion
CriterionExplanation
Bullish Breakout
For this signal to trigger, 80% of the following criterion must be met for Trading Signals:
  • General market is aligned (bullish or sideways) for the same time frame and is not extended.
  • General market is aligned (bullish or sideways) for the next higher time frame and is not extended.
  • Sector that the symbol trades in is aligned (bullish or sideways) for the same time frame and is not extended.
  • Sector that the symbol trades in is aligned (bullish or sideways) for the next higher time frame and is not extended.
  • Trend for the symbol being examined is not extended for the current time frame
  • Trend for the symbol being examined is not extended for the next higher time frame
  • Multiple clustered swing points that are broken on the breakout for this time frame
  • Complimentary swing point breakouts on multiple time frames
  • The breakout has no obvious anchored resistance just beyond the current breakout area
  • Confirmed versus suspect breakout
Bearish
Breakout
For this signal to trigger, 80% of the following criterion must be met for Trading Signals:
  • General market is aligned (bearish or sideways) for the same time frame and is not extended.
  • General market is aligned (bearish or sideways) for the next higher time frame and is not extended.
  • Sector that the symbol trades in is aligned (bearish or sideways) for the same time frame and is not extended.
  • Sector that the symbol trades in is aligned (bearish or sideways) for the next higher time frame and is not extended.
  • Trend for the symbol being examined is not extended for the current time frame
  • Trend for the symbol being examined is not extended for the next higher time frame
  • Multiple clustered swing points that are broken on the breakout for this time frame
  • Complimentary swing point breakouts on multiple time frames
  • The breakout has no obvious anchored resistance just beyond the current breakout area
  • Confirmed versus suspect breakout
Potential Bullish Breakout For this signal to trigger, the current price point must be within one bars ATR of triggering a Bullish Breakout AND 80% of the following criterion must be met for Trading Signals:
  • General market is aligned (bullish or sideways) for the same time frame and is not extended.
  • General market is aligned (bullish or sideways) for the next higher time frame and is not extended.
  • Sector that the symbol trades in is aligned (bullish or sideways) for the same time frame and is not extended.
  • Sector that the symbol trades in is aligned (bullish or sideways) for the next higher time frame and is not extended.
  • Trend for the symbol being examined is not extended for the current time frame
  • Trend for the symbol being examined is not extended for the next higher time frame
  • Multiple clustered swing points that are broken on the breakout for this time frame
  • Complimentary swing point breakouts on multiple time frames
  • The breakout has no obvious anchored resistance just beyond the current breakout area
  • Confirmed versus suspect breakout
Potential Bearish Breakout For this signal to trigger, the current price point must be within one bars ATR of triggering a Bearish Breakout AND 80% of the following criterion must be met for Trading Signals:
  • General market is aligned (bearish or sideways) for the same time frame and is not extended.
  • General market is aligned (bearish or sideways) for the next higher time frame and is not extended.
  • Sector that the symbol trades in is aligned (bearish or sideways) for the same time frame and is not extended.
  • Sector that the symbol trades in is aligned (bearish or sideways) for the next higher time frame and is not extended.
  • Trend for the symbol being examined is not extended for the current time frame
  • Trend for the symbol being examined is not extended for the next higher time frame
  • Multiple clustered swing points that are broken on the breakout for this time frame
  • Complimentary swing point breakouts on multiple time frames
  • The breakout has no obvious anchored resistance just beyond the current breakout area
  • Confirmed versus suspect breakout

 

Definitions:

1. Aligned - To be aligned implies that the qualified trend is supportive. To be supportive, the trend must be of the same direction (bullish or bearish) or it must be sideways.

2. Not extended - For a trend to be not extended, the MTTF (mean-time-to-failure) which is computed for every listed symbols qualified trend must be 50% or less.

3. Complimentary retest and regenerate signal refers to the notion that not only is the listed symbol doing a retest and regenerate sequence on this particular time frame but that it is doing it on another time frame as well.

4. Light volume retest is a comparison of volume on the bar that is doing the retrace as compared to the volume of the swing point that was previously broken as well as the bar that broke the swing point. Volume on the bar retracing should be less than the greater of these two bars.

5. Confirmed versus suspect is the general notion of a breakout being confirmed (volume was greater on the bar doing the break than the bar being broken) or suspect (volume is less on the bar doing the break than the bar being broken).

 

Signal Definitions:

In each of the signals generated, certain information is relayed. The following is an explanation of each of the line items you may see in the generated signal.

1. ABCD - The ABCD structure is widely followed in technical analysis and although we have varied it slightly. The general accepted definition is that, for a bullish ABCD pattern, price starts from some observable low (A point) then rises to a peak (B point) from which it retraces and bottoms (C point) and then begins to rise again. When it crosses the B point, it triggers the pattern which then targets the D point as a 1:1 extension of A to B = C to D. The variation that we use at Neo TA is to compute a percentage move from the A to B point to project a percentage move for the C to D point. Currently we use swing point highs and lows as the A point. We are working on algorithms that are much more acccurate.

2. Short Interest Ratio - Take from Trading Cube page which is the Short % of Float as of the prior end of month

3. Avg. 60 Day Volume in Millions - Just what it says

4. Time Frame - Short, Intermediate, Long term where short is daily charts, intermediate is weekly charts, long term is monthly charts

5. Sector - The major sector that this stock trades in

6. Signal Date - When the signal was generated

7. # Bars To Retrace - Only applicable to retraces and it is the # of bars that have transpired so far prior to the a retest of the breakout area. Significant in that if more than 6 bars, then the probabilities of the retrace being bought increase greatly

 

 

* Note that Trading signals uses non-adjusted quotes. NeoTA assumes no responsibility for erroneous trading signals that result from erred quotes or any other potential errors although we take great care in providing accurate and timely signals. If you encounter what you believe to be an erroneous trading signal, please notify This email address is being protected from spambots. You need JavaScript enabled to view it. with the name of the signal, the date it was generate and why you believe it to be incorrect.