Developing Trade Strategy: Indicator Strategy

A Stock Index Trading Strategy refers to a set of indices rules which you follow to manage your trades. These rules will determine when you open a trade and when you will exit the open trade. A trade strategy is created by combining 2 or more indicators.

For illustration, Stochastic Oscillator can be combined with other indicators to develop a Strategy. For this example stochastics oscillator can be combined with the indicators below to come up with the following Stock Index Trading Strategy.

• RSI
• MACD
• Moving Averages

Example of Stock Indices Trading Strategy - System Example

Developing Stock Indices Trading Strategy - Indices Trading Strategy Trading Example

So the question is how can one come up with a Strategies that work like the one above and how does one writedown it's rules? follow the steps outlined below.

Seven steps to developing a technical indicator-based Strategy

To come up with these set of Index trading rules we make use of the following 7 steps.

1. Select your Timeframe

The first step depends on the number of hours you want to dedicate to trading. Whether you prefer sitting in front of the computer constantly for several hours analyzing short charts timeframes OR you prefer setting up your trade charts using bigger and larger time-frames once or twice a day. Choosing/Selecting a chart time frame will mainly depend on what type of trader you are.

While testing your new Stock Indices Trading Strategy you may want to find out about its performance on different chart time frames and then choose the most accurate and profitable trade chart time-frame for you.

2. Choose and Select indicators to identify a new trend

The goal of a trader is to get into the trade as early as possible and take maximum advantage of price moves.

One of the common ways to spot a new trend as fast as possible is to use MAs Indicator. A simple Index strategy is to use a moving average Indices cross-over Strategy that will identify a new opportunity at its earliest stage.

Moving Average MA Crossover Method - System Example

Sell signal & Buy signal Derived and Generated by Moving Average MA Crossover Method - System

3. Select additional indicators to confirm the trend

Once we find a new trend on the trade charts we need to use additional charts indicators that will confirm the entry signals and give either a green light for action or save one from fake-outs.

To confirm the trade signals we use RSI and Stochastic Oscillator.

RSI & Stochastic Oscillator Strategy - System Example

4. Finding entry and exit points

Once the indicators are chosen and selected so that one indicator gives and generates the signal & another confirms the signal, it is time to open a trade.

A trader should enter as soon as a signal is generated & confirmed after a candle closes.

Aggressive traders enter a trade immediately without waiting for current bar to close.

Most traders wait until the current price bar is closed & then enter the transaction if the trade setup hasn't changed & the signal remains valid. This method is more considerate and prevents additional false entries & whipsaws.

Generating Index Signals - Indices Trading Strategy

Generating Index Signals - System Example

For exits, one can either set an amount of Index pips he wants to earn per trade or use technical tools that help to set profit goals like Fib expansion or set a protective stop loss order depending on the market price volatility at any one particular time. Alternatively one can exit the trade position when the indicators give an in the opposite market trend signal.

When opening a new Index trade it's always important to calculate in advance how much you're willing to lose if the transaction moves against you.

5. Calculate risks in each setup

In trading you must calculate your trading risk for each trade. Serious Indices traders will only enter an order if the risk : reward ratio is 2:1 or more.

If you use a high risk-reward ratio like 2:1, you increase your chances of becoming profitable in the longterm.

The Reward : Risk Chart below indicates to you how:

Money Management Risk:Reward Chart - System

In the first example illustration of Risk to Reward Ratio, you can see that even if your Index Strategy only won 50% of your Index trades, you'd still earn a profit of $10,000 like as shown & displayed on example above. Read more on this topic: Money Management Principles & Money Management Methods.

Before opening a new trade, a stock index trader should define the point at which he will close-out the trade transaction if it turns out to be a losing one. Some people use Fib levels and support & resistance levels. Others just use a pre-determined stop loss to set stop loss once they have opened a trade.

6. Write down the Strategies rules and follow them

A Trade Strategy refers to a set of trading rules which you follow to manage your trade transactions.

The keyword is A SET OF TRADE RULES which you must follow. If you do not follow the rules then you don't even have a Trading Strategy in the first place.

The next Indices Strategies lesson shows you an example of how to use the above steps to create your own Indices online Strategy:

Next Lesson: Example illustration of Writing Trading Strategies Rules

7. Practice Indices on a Practice Account

Without enough trades, you'll not be able to realize the true profitability of your Stock Indices Trading Strategy.

Once you have your Stock Index Trading Strategy rules written, it is time to test & improve your trade Strategy by using it on a practice trading account.

Open a free practice demo account & trade your Stock Index Trading Strategy to see how well it will respond.

It is strongly recommended to begin with a demo account & practice for at least for 1 or 2 months so that to garner some practice & experience how the market works.

Once you begin making some a profit in your demo trade account you can then try opening a live/real account & start online trading Indices.

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