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A trading signal derives from a trading set-up.

The better the trading set-up, the better the trading signal.

A trading signal is generally the start of a medium term trend (or price move) of the higher term trend.

For example, the medium term time frame of the daily chart is the hourly chart. The medium time frame of the four-hour chart is the fifteen minute chart.

The trading entry is the start of a short term trend of a medium term trend.

The trading set-up is the first indication that a trend or price move is likely to start if there is a trading signal.

The trading set-up is also the first good reason why one should consider to take the first step to sell or buy.
The trading signal is the second good reason why one should take the second step to sell or buy.
And the trade entry at a low risk entry point is the last good reason why it is time to buy or sell the asset.

Warning:

Technical traders must always spend more time to validate the trading set-up
and close the trade as soon as the signal fails.

The bottom line when one is dealing with a trading signal is to know if one has a good reason why one should risk money for the trade or not. Therefore with three good reasons in place (set-up, signal, entry), one is less likely to start a stressful trade.

Indeed, a good trading set-up will attract more market participants. A good trading set-up can fail if the market environment does not support it. For example, one identifies a reliable bearish trading set-up, but the market is very bullish. Though, there is nothing wrong with the trading set-up, one should refrain from trading it when there is no reasons for the market to fall. It is more prudent to focus on a bullish watch-list at that point in time.

Another thing, one ought to bear in mind is that a good bullish trading set-up can also become useless in a bullish market if new negative factors emerge without prior notice.
Though, everything looks good, one must always wait until conditions become acceptable (in case the market leaders, indicators (crude oil, gold and USDJPY), sector or the fundamentals begin to flash negative warnings).

One should not hesitate to cancel the urge to trade a financial instrument any time the risk increases.
Even if one is already in the trade, one should be swift in dealing with trades that are more likely to become liabilities.

Warning: Note that the terms short, medium and long term trends are relative to how long one wants to hold a trading position.

Indeed, a day trader may consider the daily chart as a long term trend, but a position trader may call it a short term trend while a swing trader may refer to the daily chart as a medium term trend.

Problems With Trading Signals

There are many problems with the trading signals. For example, technical traders often think that if there is a trading signal then they must take that signal.
Really, one does not have to take every trading signal.
One is free to take it or not depending on the market environment or risks attached to it.

The trading signal is not the most important thing for a technical trader, but the set-up.
However, the trading signal becomes the number one element that one must watch if one is already in the trade.

Indeed, traders who consistently trade high probability trading set-ups that they have taken time to master will do better than others. Moreover, the root or origin of the trading signal is the trading set-up.

Types Of Trading Signals

There are two types of trading signals. The first is the direct trading signal that derives from the price action. The second is the indirect trading signal that derives from technical indicators. An indirect trading signal ought to be validated by a direct trading signal to avoid technical trading mistakes. When one gives precedence to the indirect trading signal, one is trading the technical indicator instead of the price-action. Please trade firstly and lastly the price-action. Or at least, work on that until there is no need to rely on any technical indicators.

Surely, most new traders rely on technical indicators, but one must use them in combination with the price-action and structures. As new traders become more fluent in the language of the price-action, they can start to use the Elliott wave patterns, predictive fractal patterns and candlestick chart bars.

If the trading signal is negated on the signal time frame, one must close the trade as soon as possible
whether it is profitable or not.

The best bullish trading signals occur at a support level, but best bearish signals occur at a resistance key level.
A trading signal can be weak, mild or strong. A trader who mastered a trading signal after trading it many times before can easily determine whether it is weak, mild or strong..

It is always prudent that one familiarize oneself with a trading signal before using it.
A rotten or useless trading set-up will generate weak or unreliable trading signals.

Never take a trading signal that you do not understand or master as a technical trader.

There is another trading mistake that relates to trading signals. This time,
a technical trader is scanning for bullish stocks on the hourly chart. He gathered a list of stocks that he wants to swing trade. However, he uses the hourly chart for the trading signals and ten-minute chart for the entry.
After the scan, he will go and enter the trade on the ten minute-chart.
To avoid trading mistakes in that case, he ought to check the daily chart to see the trading set-ups that have produced those trading signals on the hourly chart before switching to the ten-minute chart. Another way that swing trader could avoid mistakes would be to scan for bullish financial instruments on the set-up time frame instead of the signal time frame. Next, he will manually if possible ascertain their validity before waiting for a signal and low risk entry point.
In most cases, traders are repeating the same mistake without knowing it.

A trading signal signal can take time to complete. For that reason, one should stay patient until it is ready (well done like a steak) before one will take it.
For example, a candlestick pattern trader that is trading the bullish hammer on the daily chart must wait until the first bullish candlestick bar after the hammer is closed on the daily chart before he or she will attempt to trade it.
Always check if the signal is ready before taking it.

A trading signal is an opportunity, and one ought to make sure one gets the best out of it. Many times, traders can mess up a reliable trading signal by mishandling it.
It is OK to admire the trading signal or to be excited about it. However, one must adopt a more composed attitude before taking the signal.
In effect, one can ask questions like:
Would the current market environment help?
Which day or what would be a better time to enter the trade?
Is there anything that could mess up that reliable trading signal?
All in all, one will take adequate measures to ensure that one gets paid.

Conclusion

When dealing with a trading signal, a technical trader ought to adopt the attitude of a supermarket manager.
A good supermarket manager will only buy or sell good quality products with high margins. His goal is to make profit and that is his number one determinant. Similarly, a technical day or swing trader must only take good quality trading signal with fantastic risk-reward ratio.
He or she must always care about avoiding losses. Like the manager who knows his products, a technical trader must understand and master the trading signals that he or she is taking.
Whether it is a red, green or free trading signal, trade it like a professional trader with precision.
Is that too much ask?
May be, but just keep working on it until there is no more room for improvement.

It is always a pleasure for me to share trading tips that can help. I enjoy writing this article too. My wish is that it helps to correct those common trading mistakes relating to how to take a trading signal more precisely.
Please feel free to share this article on your favorite social website.
It means a lot to us.
Either way, thank you for reading and happy technical trading.

This article is written by George Beaulieu founder of
http://www.stochastic-macd.com
http://www.24Elliottwaves.com
http://www.dayprotraders.com