How do you measure the strength of a technical signal in futures markets?

Technical analysis is a method of forecasting future price movements based on historical patterns, trends, and indicators. Futures markets are highly liquid and volatile, offering many opportunities for traders to profit from price fluctuations. However, not all technical signals are equally reliable or profitable. How do you measure the strength of a technical signal in futures markets? In this article, we will discuss some criteria and tools that can help you evaluate the quality and validity of a technical signal.

1 Signal Confirmation

One way to measure the strength of a technical signal is to look for confirmation from other sources. Confirmation means that the signal is supported by additional evidence, such as a breakout, a volume surge, a divergence, or a confluence of indicators. For example, if you see a bullish crossover of moving averages on a futures chart, you can look for confirmation from a higher high, a rising RSI, or a bullish candlestick pattern. Confirmation can increase the confidence and accuracy of a technical signal, as well as reduce the risk of false signals.

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Camilo Andrés Medina Garzón

Trader | Economista | Magíster en Finanzas | Esp. en Finanzas | Esp. en Mercado de Capitales | Operador con Certificación AMV
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En mercado de futuros considero que hay dos indicadores importantes para la confirmación de señales y patrones. Por un lado tenemos el volumen, el cual considero que es importante en cualquier activo; y en el caso particular de los futuros, el interés abierto es otro factor importante para complementar la tendencia o fuerza de los movimientos en el mercado.

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A Raj آنند راج

Trading, Digital Assets & KOL Specialist @ Deribit | CTP | Ex-GE | Ex- Delta Exch KOL Management, Derivatives + Options Education +Trade Content on Socials
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I would like to explain this via an analogy- if you try to put your hand close to hot kettle, it will be thrown off. now, the intensity of hotness of kettle with decide how rapid and violent the reaction will be. similarly, the hot/ very high amount of unfilled order zone will act as hot kettle, and when those will be touched, the price will move very very sharply.

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Jay Patel

Featured Market Expert on ET Now Swadesh, CNBC, NDTV Profit, Moneycontrol, Business Today & ET Markets | MCA-IICA Certified Independent Director
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When you a sharp rise in price followed by heavy volumes (volumes higher than its average of past 30 days) with RSI rising and witnessing positive crossovers. With all 3 above checkpoints, it would be also important to see MACD rising with positive divergence on charts.

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2 Signal Consistency

Another way to measure the strength of a technical signal is to check its consistency over time and across different time frames. Consistency means that the signal is persistent and stable, rather than erratic or random. For example, if you see a trend line on a futures chart, you can check how many times the price has touched or bounced off the line, and how long the trend has lasted. You can also zoom in and out of the chart to see if the trend line is valid on different time frames, such as daily, hourly, or minute. Consistency can indicate the robustness and reliability of a technical signal, as well as its potential to continue.

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Patrick Lilly

Chief Executive Officer at Ring of Fire General Partner
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"Another way to measure the strength of a technical signal is to check its consistency over time and across different time frames..." In doing so, your indicators should translate across timeframes to provide reference points - A long MA becomes the short MA on a longer term chart. Using 12 and 50 MAs on a 15min chart and then flipping to hourly will show a high degree of correlation between the 12 on the hourly and the 50MA on the 15 minute timeframes.

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3 Signal Context

A third way to measure the strength of a technical signal is to consider its context within the broader market environment. Context means that the signal is aligned with the dominant market sentiment, the underlying fundamentals, and the prevailing market conditions. For example, if you see a bearish reversal pattern on a futures chart, you can check if the market is overbought, if the fundamentals are deteriorating, or if the volatility is increasing. Context can enhance the relevance and significance of a technical signal, as well as its probability of success.

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Jay Patel

Featured Market Expert on ET Now Swadesh, CNBC, NDTV Profit, Moneycontrol, Business Today & ET Markets | MCA-IICA Certified Independent Director
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This is important point one should keep in mind. If you see price of particular stock rising, while stock is among main components of Index, it is very necessary to understand how overall market is behaving. If market breadth is in favor of bulls and stock is rising and if that particular sector is also bullish, we can see strong momentum in that stock.

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4 Signal Testing

A fourth way to measure the strength of a technical signal is to test its performance and profitability using historical data and backtesting tools. Testing means that the signal is verified and validated by empirical evidence, rather than by subjective opinions or assumptions. For example, if you have a trading strategy based on a technical signal, you can use a backtesting software to simulate how it would have performed in the past, using real futures data. You can also use a demo account to practice how it would perform in the present, using live futures data. Testing can measure the effectiveness and efficiency of a technical signal, as well as its risk-reward ratio.

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5 Signal Selection

A fifth way to measure the strength of a technical signal is to compare and contrast it with other possible signals in the same market or instrument. Selection means that the signal is chosen and prioritized based on its merits and advantages, rather than by convenience or preference. For example, if you have multiple technical signals on a futures chart, you can use a scoring system or a ranking method to evaluate and rank them according to their strength, quality, and suitability. You can also use a filtering or a screening process to eliminate or ignore the weak, conflicting, or irrelevant signals. Selection can optimize the outcome and performance of a technical signal, as well as its consistency and compatibility.

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6 Signal Execution

A sixth way to measure the strength of a technical signal is to monitor and manage its execution and outcome in real time. Execution means that the signal is followed and acted upon according to a predefined plan and criteria, rather than by impulse or emotion. For example, if you have a trading signal on a futures chart, you can use a trading platform or a broker to execute your trade, using a stop loss, a take profit, and a trailing stop. You can also use a trading journal or a performance tracker to record and review your trade, using metrics such as win rate, profit factor, and drawdown. Execution can improve the discipline and accountability of a technical signal, as well as its feedback and improvement.

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Jay Patel

Featured Market Expert on ET Now Swadesh, CNBC, NDTV Profit, Moneycontrol, Business Today & ET Markets | MCA-IICA Certified Independent Director
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If you are confident about any particular signal and you witness stock is moving as per your strategy, don't wait for market, execute your order with pre-determined target and stop loss. Also, it is very important to adjust target little lower than determined target as same signal is followed by other investors and you may not reach your that price as traders will book profits leading to decrease in prices.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you measure the strength of a technical signal in futures markets?

1

2

3

4

5

6

7

1 Signal Confirmation

2 Signal Consistency

3 Signal Context

4 Signal Testing

5 Signal Selection

6 Signal Execution

7 Here’s what else to consider

Technical Analysis

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How do you measure the strength of a technical signal in futures markets?

1

2

3

4

5

6

7

1 Signal Confirmation

2 Signal Consistency

3 Signal Context

4 Signal Testing

5 Signal Selection

6 Signal Execution

7 Here’s what else to consider

Technical Analysis

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