Conflicting Trading Signals? Try a Tie-Breaker

If your trading system is anything like mine it will sometimes generate signals that conflict, telling you to go both long and short at the same time. Or alternatively, it may generate no signals at all, essentially saying "sit this one out."

For me this occurs most often in situations where the market has been ranging for a while and my formulas are having a hard time picking a clear trading direction out of the noise. Some people would decide to stay on the sidelines in these situations, concluding that there was insufficient information to make a clear prediction, and having the discipline to step back from their trading system when it's giving no clear signals. But not me. Since I have a tendency to overtrade - getting into the market even in ambiguous trading situations - of course I had to find a way to extend my system to resolve these types of "ties."

The solution was to run a bunch of backtests with the criteria "IF Long Signal = YES and Short Signal = YES" OR "IF Long Signal = NO and Short Signal = NO", show results of all hypothetical long and short trades. This gave me a pip value for whether the market tended to go long or short in these situations. As it turned out, when my signals are tied, the market tends to go long. So in essence I've forced a new long signal out of my system, and have also ensured that it will always provide a usable signal for trading.

Now I can indulge my desire to (over)trade every day and not miss any action, but in a way that's at least based on historical data. No more frustration over conflicting signals!