Understanding Signals

Invalidations and Confirmations

All Crayon signals share common behavior when it comes to bias invalidation and reconfirmation, to understand it you need to look at a signal candle as short-term horizontal support and resistance levels.

For presentation purposes, the following examples in slides 18-22 have horizontal lines drawn from the signal candle open and close. Please note, instead of using signal candle open and close points, a trader can track high and low points, which acts as a safeguard against false invalidations that can be induced by whipsaws and an erratic market, but this yields greater risk and slower re-entry.

Confirmation Mechanics

The market is curious by nature, it loves to test the levels and conviction of trades, the example above shows exactly that, if done with proper discretion these tests can be utilized to build better entries for position. Reconfirmation of a bullish signal happened soon after by the candle closing above the reconfirmation line.

The below example shows bearish signal acceptance after one of the following candles closed below the reconfirmation line.

Invalidation Mechanics

Please note that the invalidation of a signal can be seen as a validation of the opposite signal, for example if the signal saying bearish is invalidated, then you can treat the candle that invalidated it as a bullish signal and vice versa. To be safer, it’s advisable to wait for the next candle to extend higher/lower.

Quick bullish signal invalidation following a candle engulfing B and closing below invalidation line

If you’re brave you can use invalidation as a reverse signal, entering in the opposite direction than initial signal suggested.

Its potent strategy, but not advised for inexperienced traders, yet we feel the need to acknowledge about such behavior, because the hit rate and logic of the signal is as impressive if not more impressive than initial one.

Please note it needs more testing before we can advise it as strategy component.