Creating Trade System: Indicator Stock Indices System

A System refers to a set of stock indices rules that you follow to manage your trades. These rules will determine when you open a trade & when you will exit the open trade. A trade system is created by combining two or more technical indicators.

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

• RSI
• MACD
• Moving Averages

Example of system

Creating Stock Indices System - System Example

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

Seven steps to creating an indicator-based system

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

1. Choose your Chart Time Frame

This first step depends on how many 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 trade chart time frame will mainly depend on what type of trader you are.

While testing your new system you may want to find out about its performance on different chart time frames & then choose the most accurate & 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 MAs Indicator. A simple Stock Indices strategy is to use a moving average Stock Indices crossover system that will identify a new opportunity at its earliest stage.

Moving Average Crossover Method - Trade Strategy

Sell signal & Buy signal Generated by Moving Average Crossover Method - Trade Strategy

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 and Stochastic Oscillator Technical Indicator Trade System

4. Finding entry and exit points

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

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

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

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

Generating Stock Trade Signals - Trading Stock Indices Strategy

Generating Stock Trade Signals - Trading Stock Indices Strategy

For exits, one can either set an amount of Stock Indices 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 given time. Alternatively one can exit the trade when the indicators give an opposite signal.

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

5. Calculate risks in each setup

In Stock Indices you must calculate your risk for each trade. Serious Stock 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 - Trade Strategy

In the first example of Risk to Reward Ratio, you can see that even if your trading system only won 50% of your Stock 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 order once they have opened a Stock trade transaction.

6. Write down the Stock Indices systems rules & follow them

A Trade System 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 don't follow the rules then you don't even have a system in the first place.

The next systems lesson shows you an example of how to use the above steps to come up with your own Stock Indices online system:

Next Lesson: Example of Writing Trade Systems Rules

7. Practice Stock Indices on a Demo Account

Without enough trades, you'll not be able to realize the true profitability of your system.

Once you have your system rules written, it's time to test & improve your trade system by using it on a practice demo account.

Open a free demo account & trade your system to see how well it will respond.

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

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