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Triggers, Signals, Price Targets, and Stoplosses

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Triggers

A trigger is an event that causes a trade to be initiated,

which for most practical purposes is simply an entry
filter at work.
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Triggers

Triggers can be classified as either price based or

non‐price based.
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Triggers

Price based triggers are regarded as the most reliable

type of trigger, and are most commonly used by
traders, since price is the best indicator of directional
change.
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Triggers

Non‐price based triggers are also sometimes

employed, especially by robotic or automated trading
programs, where entries and exits are executed when a
specific trading condition is met, which may or may not
be directly related to the penetration of some
significant price level or overlay barrier.
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Price based triggers are price penetrations of:

■■ Previous support and resistance levels

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Price based triggers are price penetrations of:

■■ 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 BarCounts, etc.)
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Price based triggers are price penetrations of:

■■ Overlay indicators such as moving averages,

trendlines, channels, fixed percentage and volatility
bands, Fibonacci and Gann levels, fan lines,
Ichimoku clouds, Floor Trader’s Pivot Points, and so on
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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)
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• 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 divergence will usually misdirect the trader or automated trading programs
into believing 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.
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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.
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Some examples of commonly used signals are:

■■ Divergences between price and overlays

■■ Divergences between price and oscillators
■■ Divergences in phase between similar oscillators
■■ Divergences between different oscillators
■■ Intermarket divergence
■■ Specific bullish or bearish price formations (such as
shooting stars, head and shoulders, catapults, etc.)
■■ Oscillator signal line crossovers
■■ Oscillator zero and 50 percent level crossovers
■■ Oscillator chart pattern violations
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Oscillator overbought/oversold (OBOS) level tests or breaches

■■ Oscillator overlay tests or breaches (e.g., Bollinger Band on RSI)

■■ Specific algorithmic sequences and counts that set up a bullish
or bearish condition or identify exhaustion in price (e.g., Tom
DeMark’s TD Sequential)
■■ Bullish or bearish indications derived from Sentiment, Market
Breadth, Statistical, Seasonal, and Behavioral indicators, and similar
Projected cycle lows and highs
■■ Bullish or bearish price triggers occurring in related or closely
correlated markets
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Price Objectives or Targets

Price objectives or targets are predetermined price levels at

which a trader exits from long and short positions in the market.
They are popularly referred to as a take profit level where a
position is normally exited via a:

■■ Buy or sell limit order (upon triggering the take profit level)
■■ Buy or sell stop order (upon triggering the protective
stoploss)
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Price targets may be based on a simple test of support and

resistance, or derived using various forms of price projection
based on chart patterns, Fibonacci ratios, Gann levels, money
management, or on important historical and psychological price
levels.

Even though market participants usually use price to trigger a

profit exit, signals may also be used, especially in conjunction
with a protective stop.
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Some examples of price objectives or targets include:

■■ Chart‐pattern based 1:1, 2:1, and 3:1 price target projections

(typically based on the chart pattern’s height)

■■ Reward to risk ratio (R/r ratio) based profit target projections

■■ Technically significant price levels such as previous support

and resistance levels
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Some examples of price objectives or targets include:

■■ Technical barriers to price in the form of overlay targets such

as moving averages, trend lines, channel tops and bottoms,
Ichimoku clouds, Fibonacci and Gann levels, and fans
Significantly clear and obvious supportive and resistive
confluences or convergences

■■ Horizontal and vertical counts on the Point‐and‐Figure charts

■■ Any price‐based triggers, which may also be used as

potential price targets
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Stoploss Levels

Stoploss levels represent the price levels at which positions

are fully or partially exited, either for profit or loss. Stoploss
levels are usually based on price. Some examples include
the test or breach of:

■■ Support levels for longs and resistance levels for shorts

■■ Supportive confluences for longs and resistive
confluence levels for shorts
■■ Overlay barriers
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Stoploss Levels

Not all stops are technical stops. Some stops are constructed
on money management principles, and may therefore be
based on a simple fixed‐dollar risk or a percentage of current
or initial capital.
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Confirming and Non‐Confirming Price Acion and Filters

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In order for a reversal or breakout to occur, the exact price

of entry must be known to provide confirmation that a
move has indeed occurred.

As seen in an earlier chapter, the application of entry filters

helps traders fine tune an entry, with the intention of filtering
out unwanted price action and noise and in the process
potentially reducing the probability of experiencing false
breakouts or reversals that may interfere with an otherwise
good entry.
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There are two important caveats. First, no filter is foolproof.

And second, the act of filtering tends to attract or encourage more

filtering as the trader attempts use a second filter with the intention
of correcting one or more defects in the original filter.

This process may keep repeating, in a relentless feedback cycle,

as the trader struggles to create the perfect filter with zero defects!

The trader eventually realizes that his or her so‐called perfect filter
has in fact filtered out nearly all price action, making any potential
entry most improbable.
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Below are the four most commonly applied entry filters,

which were covered

1. Closing Filter
2. Price Filter
3. Time Filter
4. Algorithmic Filter
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Refer to ,The point of entry into the

market depends entirely on the type of
filter and the parameter setting
employed.

It is also possible and sometimes

preferable to apply one filter on
another, but as mentioned previously,
care must be taken to not
overcomplicate the entry process.

A valid breakout or reversal is one

where a selected filter condition is met.
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Depending on the filter setup, valid

breakout and reversal entries could be
initiated at different price levels.

It is important to note that a filter or

combination of filters that a trader
eventually elects must be in accordance
with the type of market traded and the
strategy used.

It should also suit the trader’s or investor’s

behaviour profile, risk capacity, and trading
objectives.
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Reconciling Trader Profile with the Appropriate Entry Filter

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Risk averse with respect to time of entry but risk seeking with respect
to price on entry.

These participants require confirmation of a breakout or reversal prior

to initiating an entry.

The entry filter is allowed to validate breakouts or reversals up to

some distance beyond the initial price penetration or test, and
therefore need not be too responsive.

They do not mind paying a slightly less favourable price on entry.

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Risk seeking with respect to time and price on entry.

These participants do not mind initiating an entry prior to an

initial price penetration or test of a breakout or reversal, or very
late thereafter.

They do not mind paying a less favorable price on entry.

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Risk seeking with respect to time and price on entry.

In this case, should the participants elect to use an entry filter at

all, it may be set to allow price the greatest possible freedom of
movement before a late entry is validated, thus being more
forgiving as it allows for greater noise exclusion.

Should the participants anticipate entry prior to the breakout or

test, the election of a pre‐entry filter is more appropriate,
although the actual pre‐conditional settings may not be
attributed with much weight.
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Risk seeking with respect to time of entry but risk

averse with respect to price on entry.

These participants do not require confirmation of a

breakout or reversal prior to initiating an entry.

But they do mind paying a less favourable price on

entry.
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Risk seeking with respect to time of entry but risk averse with
respect to price on entry.

Therefore, should the participants anticipate an early entry

prior to a breakout or test, the filtering or preconditions for
that early entry will be critical and significantly more
important to these participants.

The pre‐entry filter needs to be need fairly responsive.

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Risk averse with respect to time and price on entry.

This risk profile reflects the behavioural characteristics

of the majority of market participants.

Generally speaking, for market participants who are

mostly risk averse in both time and price, it is best to
elect entry filters that are very responsive.

The filter should be set to validate an entry fairly close

to the initial price penetration or test of a breakout or
reversal.