Creating a Trade Strategy: Trading Indicator Based Strategy

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

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

RSI
MACD
Moving Averages

Example of trading Strategies - Trade Strategy Example

Developing a Strategies: Trading Indicator Based Strategy - Trade Strategies Example

Creating a Strategy - Stock Index Strategy Example

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

Seven steps to creating a indicator-based Strategy

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

1. Choose your Time Frame

This first step depends on number of hours you 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 trade charts using bigger time frames once or twice a day. Choosing a trade chart timeframe will mainly depend on what type of trader you are.

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

2. Choose trading indicators to spot a new market 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 Indices crossover Strategy that will identify a new opportunity at its earliest stage.

Moving Average Crossover Method - Trade Strategy Example

Developing a Strategies: Indicator Based Strategy - Stock Index Strategies Example

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

3. Choose additional indicators to confirm the market trend

Once we get a new trend on the 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 & Stochastic Oscillator.

Developing a Strategies: Trading Indicator Based Strategy - Stock Index Strategies Example

RSI & Stochastic Oscillator Indicator Trading Strategies - Trade Strategy 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's time to enter a trade position.

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

Aggressive traders enter a trade transaction 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 has not changed and the signal remains valid. This method is more considerate & prevents additional false entries and whipsaws.

Generating Trade Signals - Trading Indices Strategy

Generating Trade Signals - Trade Strategy Example

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

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

5. Calculate risks in each setup

In you must calculate your risk for each position. Serious index traders will only enter look to open an order it 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 long-run.

The Reward to Risk Chart below shows you how:

Developing a Trade Strategies: Trading Indicator Based Strategy - Stock Index Strategies Example

Capital Management Reward Risk Chart - Trade Strategy

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

Prior to opening a new trade, a stock indices 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 & support and resistance levels. Others just use a pre-determined stop loss to set stop loss order once they have opened a trade.

6. Write down the Strategies rules & follow them

A Trade Strategy refers to a set of trade rules which 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 develop your own Indices online Strategy:

Next Lesson: Example of Writing Trade Strategies Rules

7. Practice Indices on a Practice Demo Account

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

Once you have your Indices Strategy rules written, it is time to test and improve your trade Strategy by using it on a practice trading account.

Open a free demo account and trade your Indices Strategy to see how well it will respond.

It is strongly recommended to start with a demo account and practice 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 trading account you can then try opening a live account and begin trading online index.

Learn More Topics and Tutorials:

Trade Stock Indices

Creating a Trade Strategy: Trading Indicator Based Strategy

Seven steps to creating a indicator-based Strategy

4. Finding entry and exit points

5. Calculate risks in each setup

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