The next part of the algorithm is called the baseline. The baseline could also be called a trend line in my opinion because, essentially, this is exactly the function of the baseline. It is making sure you are getting into trades that are trending, keeping you out of trades that aren’t trending and are helping exiting from trades that are no longer trending.
The search for the perfect baseline is one of your many endeavors in your journey to make the perfect algorithm. A baseline that does not hug the price close enough will not allow you to enter trades in the 1 ATR zone from the baseline. The price will zoom right past a baseline that is too slow and will not act as a supplement to avoiding losses by being able to exit you out of trades when they start to un-trend.
If you have a baseline that hugs price too tightly by either its own functionality or by shortening the period range to a much lower setting you will have a baseline that will be getting you into every trade.
In addition, it will constantly exit you from trades because the price will cross over your baseline too much causing you to exit every time it crosses it.
There is definitely a baseline that can stay close to the price but not too close and your job is to hunt for a baseline that gives you a nice balance.
To understand the function of the baseline in conjunction with the primary and secondary indicator, take a look at this tutorial video which shows the basics of a baseline cross entry.
Moving onto the next part of the algorithm is the exit indicator.
The exit indicator’s function is explained exactly in the name itself. This part of the algorithm’s function is solely to tell you when to get out of the trade. You do not look at the exit indicator before you enter the trade. You will only bring up the exit indicator onto your screen after you have entered into the trade.
Choosing an exit indicator seems like an easy task because essentially you are just looking for a faster type of trend following indicator. You are looking for characteristics of an indicator that knows when price has run out of steam and price is about to move in the opposite direction because the trend is finished.
Quiz No. #3
Link to the next page if you pass!