Developing a Indices Trade Strategy: Trading Indicator Based Indices Strategy

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

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

• RSI
• MACD
• Moving Averages

Example of Stock Indices trading Strategies - Stock Indices Trade Strategy Example

Developing a Indices Strategy - Stock Index Strategy Trading Example

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

Seven steps to creating an indicator-based Indices trading Strategy

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 Stock Indices 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 Stock Indices trade charts using bigger time-frames once or twice a day. Choosing a Indices trade chart time-frame will mainly depend on what type of Stock Indices trader you are.

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

Moving Average Crossover Method - Trade Strategy Example

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

3. Choose additional Indices indicators to confirm the trend

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

RSI & Stochastic Oscillator Indicator Indices Trading Strategies - Trade Strategy Example

4. Finding entry & exit points

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

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

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

Generating Stock Indices Trade Signals - Trading Stock Indices Strategy

Generating Stock Indices Trade Signals - Stock Indices Trade Strategy Example

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 Indices trade when the indicators give an opposite signal.

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

5. Calculate risks in each setup

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

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

Before opening a new Stock Index 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 & support and resistance levels. Others just use a pre-determined stop loss to set stop loss order once they have opened a Indices trade transaction.

6. Write down the Indices Strategies trading rules & follow them

A Stock Index 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 don't follow the trading rules then you don't even have a Indices trading Strategy in the first place.

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

Next Lesson: Example of Writing Stock Indices Trade Strategies Rules

7. Practice Indices Trading on a Demo 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 and improve your Stock Indices trade Strategy by using it on a practice account.

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

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

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