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Trading Signals in Algorithmic Systems — From Indicator to Execution

16 July, 2025

A trading bot doesn’t «guess» the market — it executes trades when pre-defined conditions are met. At the core of every automated system is a signal — a moment when the bot decides to enter, manage, or exit a trade. But how is that signal generated? Which indicators are used? How are false entries filtered?

This article breaks down how trading signals are formed and used in algorithmic trading.

What Is a Signal in a Trading Bot?

A signal is a set of conditions programmed into the bot’s logic. Once these conditions are met, a trade action is triggered. Signals can be:

  • Single-indicator based (e.g., moving average crossover)
  • Composite (e.g., RSI < 30 + pin bar + high volume)
  • Contextual (e.g., valid only during certain sessions or timeframes)

Common Sources of Signals

  • Technical indicators — RSI, MACD, Bollinger Bands
  • Candlestick patterns — pin bars, engulfing candles
  • Volume triggers — confirmation from volume spikes
  • Fundamental inputs — in news-driven bots (e.g., CPI, NFP)
  • Machine learning models — in advanced AI-based systems

More on indicator logic in The Role of Indicators in Algorithmic Trading

Image of the trading robot

How a Signal Becomes a Trade

Once a valid signal forms, the bot proceeds through these steps:

  1. Checks market conditions — time, spread, volatility
  2. Runs additional filters — trend strength, range breakout, etc.
  3. Calculates entry price and lot size
  4. Places SL/TP or enables position management
  5. Sends the order to the broker via terminal or API

Learn more in Choosing Parameters for a Trading Bot

How False Signals Are Filtered

  • Trend filters: only trade in the direction of the larger trend
  • Volume filters: skip trades in low liquidity environments
  • Time-based rules: restrict entries to active sessions
  • Confirmation logic: wait for candle close or multi-condition match

FAQ

Is one indicator enough to generate a signal?

Yes, for basic bots — but combined signals are usually more reliable.

Can bots use news as part of a signal?

Yes, through API-connected economic calendars or real-time feeds.

What’s better: breakout or pullback entries?

Depends on the strategy — momentum bots prefer breakouts, trend bots often wait for pullbacks.

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