Developing Trade Strategy: Trading Indicator Strategy

A Stock Indices Strategy refers to a set of stock indices rules that you follow to manage your trades. These rules will determine when you open a trade and when you'll exit the open trade. A trade Strategy is created by combining two or more trading indicators.

For example, Stochastic Oscillator can be combined with other indicators to form a Strategy. For this example stochastics can be combined with the indicators below to come up with the following Stock Indices Strategy.

• RSI
• MACD
• Moving Averages

Example of Stock Indices Strategy - Trading System Example

Developing Indices Strategy - Stock Indices Strategy Trading Example

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

Seven steps to creating an indicator-based Strategy

To come up with these set of Stock Index rules we use the following seven steps.

1. Choose your Chart Time Frame

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 time frames OR you prefer setting up your trade charts using bigger timeframes once or twice a day. Choosing a chart time frame will mainly depend on what type of trader you are.

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

2. Choose indicators to identify a new trend

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

One of the common ways to spot a new trend as fast as possible is to use Moving Averages Indicator. A simple Stock Indices strategy is to use a moving average Stock Indices crossover Strategy that will identify a new opportunity at its earliest stage.

Moving Average MA Cross Over Method - Trading System Example

Sell signal and Buy signal Generated by MA Crossover Method - Trading System

3. Choose 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 & give either a green light for action or save a trader from fake-outs.

To confirm the signals we use RSI and Stochastic Oscillator.

RSI & Stochastic Oscillator Indicator Strategy - Trading System Example

4. Finding entry and exit points

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

A trader should enter as soon as a signal is generated and confirmed after a candlestick closes.

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

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

Generating Stock Index Trade Signals - Trading Stock Indices Strategy

Generating Stock Index Trade Signals - Trading System Example

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

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

5. Calculate risks in each setup

In you must calculate your risk for each trade. Serious Stock indices traders will only enter look to open an order it the risk to reward ratio is 2:1 or more.

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

The Reward to Risk Chart below shows you how:

Money Management Reward Risk Chart - Trading System

In the first example of Risk to Reward Ratio, you can see that even if your Indices Strategy only won 50% of your Stock Index trades, you would still make a profit of $10,000 as shown on example above. Read more on this topic: Money Management Rules & Money Management Methods.

Before opening a new trade, a trader should define the point at which he will close the trade if it turns to be a losing one. Some people use Fibonacci 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 & follow them

A Trade Strategy refers to a set of trade rules that you follow to manage your trades.

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

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

Next Lesson: Example of Writing Trade Strategies Rules

7. Practice Indices on a Practice Account

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

Once you have your Stock Indices 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 Indices Strategy to see how well it'll respond.

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

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