The trading signals are determined at the close of the bar. When you are using a system to take trading signals, the signal can only be determined at the close of the bar. You do not know what the closing price is going to be and therefore you do not know the value of the indicator until the bar closes. If you are using Daily trading signals, that means at the close at 4:00PM New York time each day. Once the market closes and the price settles you now have a closing price that an indicator can calculate its value.
Let’s take the example of a 200 day moving average for the Latin America ETF, ILF for Friday February 5, 2010. The 200 day moving average was 40.91 at the close. In order to calculate that value, you must wait until the value of the close on February 5, 2010 settled.
For most of the day, the ILF ETF was below the 200 day moving average. If you made a trade based on the fact that it was below the 200 day moving average all day until the last hour, you did not follow the trading signals.
As you can see from the 30 minute chart below, a rally in the last hour brought the ILF ETF back from below the 200 day moving average to close above the 200 day moving average.
By the close of the day, the ILF ETF clearly closed above the 200 day moving average, which was the trading signal entry and exit point. If you are a systematic trader using trading signals of a close above or below the 200 day moving average, you must wait until the close to determine if the trading signal has determined an action for the next bar. In this case, there was not a new trading signal to be taken.
Once there is a close that produces a trading signal change, the next issue you must have set in your trading plan is when to execute the trading signal. Is it the beginning of the next bar? Is it the close of the next bar? Your trading plan should include specific rules for the entry trading signals and the exit trading signal. This entry and exit trading signal rule will also affect any performance testing.
I use the 200 day moving average in this example, but the same applies to any technical analysis indicator like stochastics, MACD, CCI, RSI or any custom indicator. The indicator needs a closing price to determine its value and therefore issue a trading signal for the next bar.
Know how your trading signal has been written in your trading plan.
