How to trade when you get conflicting signals


The market is never 100% bullish or 100% bearish. There will always be some bullish factors and some bearish factors. Here’s what you should do when market signals conflict with each other. Remember that trading and investing is all about probability. There is no such thing as a “sure thing”.

Some signals will override other signals

Inexperienced traders will tally up the number of bullish factors and count that against the number of bearish factors.

  1. The trader will be bullish and go long when there are more bullish factors than bearish factors.
  2. The trader will be bearish and go short when there are more bearish factors than bullish factors.

This is not the proper way to trade when different market signals conflict with each other. This strategy implies that all market factors are equally important. This isn’t true. Different market factors should be weighted differently.
You should always rank the factors that you consider from most important to least important. For example, let’s assume that you consider 10 factors when trading or investing. You must rank these factors from Most Important to Least Important.
Factors that are more long term tend to be more important than factors that are more short term. For example, weekly RSI (momentum indicator) is more important than hourly RSI. Fundamentals are more important than short term technical indicators because fundamental indicators impact the market’s long term direction.
Short term factors can easily be overwhelmed by short term market forces. For example, let’s assume that the long term factors are bullish but the short term factors are bearish. The market might not make a pullback at all if the market’s “buy the dip” mentality is strong enough right now!
What happens when it’s not clear whether there are more bullish factors or bearish factors? What if your list of signals looks like this?

  1. Signal #1: bullish
  2. Signal #2: bearish
  3. Signal #3: bullish
  4. Signal #4: bearish
  5. Signal #5: bearish
  6. Signal #6: bullish
  7. Signal #7: bullish
  8. Signal #8: bearish
  9. Signal #9: bullish
  10. Signal #10: bearish

This tends to happen after major consolidations when the market is deciding to breakout or breakdown. Too many signals conflict with each other.
Always focus on the one factor that is the most important for your market when the factors are neither decisively bullish nor bearish. For example, the U.S. economy is the most important factor for the U.S. stock market’s medium-long term direction. I will ignore the technicals and focus on the fundamentals if the economy is improving but the market’s technicals are bearish. Strong enough fundamentals can easily override bearish technicals. This is what happened in 1995 and 2017. The stock market was overbought throughout the entire year but the fundamentals were strong enough to override the bearish technicals.

Focus on risk reward

I cannot stress enough the importance of risk:reward. Risk:reward will help you trade when the market is sending you conflicting signals.
Let’s assume that 50% of the factors are bullish and 50% of the factors are bearish, but the risk:reward is heavily skewed towards the upside. Focus on the risk:reward. The stock market’s probability of going up or down is 50% each, but the market’s percentage movement (MAGNITUDE) is a lot higher if it goes up than if it goes down.
Here’s a simple example.
Nobody could have called the stock market’s exact bottom in March 2009. The stock market’s short term probability was 50-50. It was just as likely to go down as it was to go up. However, the economy was improving and the stock market was undervalued. Hence, the downside risk was limited while the upside potential gains were massive. The risk:reward was heavily skewed towards the upside. Anyone who traded purely based on probability would have been sitting on the sidelines while the market soared. Anyone who traded based on risk:reward would have made huge profits from the long side.

There’s no shame in staying in cash

There will always be times when the market is not convincingly bullish or convincingly bearish. You don’t have to trade during times like this! There’s no shame in staying in cash when your market outlook is unclear.
Remember, trading is about probability and risk:reward. It’s best to just not trade when the probability is 50-50 and the risk:reward favors neither side of the market. Otherwise you’d be rolling the dice.

1 comment add yours

  1. This article somewhat conflicts with last weekends post “weekend outlook: Stocks will probably go up next week (statistical perspective).”
    ** I then stated in the comment section “Troy watch out next week because the volume was heavily diverging with the increase in price!” Throughout all of last week I saw declining volume on a 20 day hourly chart of Es. I did not listen to my own intuition and now stuck Long at 2777 in a losing position.
    –watching last Friday’s nfp non farm payroll jobs report and the tape on es, I was stuck in a short position from 2754 and had to take a 30 handle loss covering at 2781. The whole tape was strongly trending higher, I was looking throughout the day for a 5-handle pullin to “get out”. The tape was so strong we rallied from 2730 to 2790 with at most a 2 handle pullin. It was a strong trending intraday tape. But looking at hourly volume was not confirming the strong intraday trend. But looking at the strongly trending price action would have one get bull trapped such as myself going into the follow weak. Which is why I flipped long from short based on last Friday’s strong intraday trend.
    –maybe this is the new algo driven markets bull/bear trapping traders. So I need to trade smaller maybe take a 20-30 handle counter trend loss until the time plays out on my original low volume run up trade.
    — this is why I think historical backtesting is ancient in the new technical information realm. Hft algos are programmed with every historical backtesting algorithm to take the counter move, since the algos are being programmed with the psychology of every smart portfolio manager doing such studies day in and day out. The algos for the majority of the studies are countering such studies such as your study last weekend.
    Just some thought

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