Creating Trade System: Indicator Stock Index System

A System 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'll exit the open trade. A trade system is developed by combining 2 or more indicators.

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

• RSI
• MACD
• Moving Averages

Example of system

Developing Stock Index 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 down it's rules? follow the steps outlined below.

Seven steps to creating/developing an indicator-based system

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

1. Select your Time-frame

This first step depends on number of hours you as the trader want to set a side 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 charts using larger timeframes 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 system you may want to find out about its performance on different chart time frames & then select the most accurate and profitable chart time-frame for you.

2. Select trading indicators to spot a new market trend

The goal of one 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 Index cross-over system that will identify a new opportunity at its earliest stage.

Moving Average Cross over Method - Trading Strategy

Sell signal and Buy signal Derived and Generated by Moving Average Cross over Method - Trading Strategy

3. Choose/Select additional indicators to confirm the trend

Once we get a new trend on the 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 trading signals we use RSI & Stochastic Oscillator.

RSI and Stochastic Indicator Strategy

4. Finding entry & exit points

Once the indicators are selected so that one indicator gives and generates the trading signal and another confirms the trading signal, it's time to enter a trade.

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

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

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

Generating Index Signals - Index Trading Strategy

Generating Index Signals - Trading Index Trading Strategy

For exits, one can either set an amount of Indices 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 depending on the price volatility at any particular time. Alternatively one can exit the Stock Index trade when the indicators give an in the opposite trend signal.

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

5. Calculate risks in each setup

In Index you as a Stock Index trader must calculate your risk for each trade. Serious stock index 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 being profitable in the longterm.

The Reward : Risk Chart below indicates to you how:

Equity Management Risk:Reward Chart - Trading Strategy

In the first illustration of Risk:Reward Ratio, you as a stock indices trader can see that even if your trading system only won 50% of your Index trades, you'd still make a profit of $10,000 dollars such as displayed on exemplification set-out above. Read more on this tutorial: Money Management Principles and Money Management Methods.

Prior to opening a new trade position, a indices trader should define the point at which he will close-out the Stock Index trade if it turns to be a losing one. Some people use Fib levels and support and resistance levels. Others just use a pre-determined stoploss level to set stop loss after they've opened a stock indices trade.

6. Write down the Indices systems rules & follow them

A Trade System refers to a set of trading rules that you follow to manage your trades.

The keyword is A SET OF TRADE RULES which you as a Stock Index trader must follow. If you don't follow the trading rules then you don't even have a system strategy 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 Index online system:

Next Lesson: Explanation of Writing Trade Systems Rules

7. Practice Index on a Practice Demo Account

Without enough trade transactions, 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'll respond.

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

Once you start making some a profit in your practice demo account you as a stock indices trader can then try opening a live account & begin online trading Indices.

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