Creating System: Trading Indicator Stock Indices System
A Stock Index System refers to a set of stock index rules that you follow to manage your stock index trades. These rules will determine when you open a stock index trade and when you'll exit the open trade. A trade system is created by combining two or more indicators.
For example, Stochastic Oscillator can be combined with other indicators to form a trading system. For this example stochastics can be combined with the indicators below to come up with the following trading system.
- RSI
- MACD
- Moving Averages
Example of trading system
Creating Stock Indices System - Stock Index System Trading Example
So the question is how can one come up with a trading systems 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 trading system
To come up with these set of index rules we use the following seven steps.
1. Choose your Chart Time Frame
The first step depends on the number of hours you as a trader want to dedicate to 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 charts using bigger time frames once or twice a day. Choosing a trading chart time frame will mainly depend on what type of trader you are.
While testing out your new Stock Index system you may want to find out about its performance on different chart time frames and then choose the most accurate and profitable 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 Moving Averages Indicator. A simple system is to use a moving average crossover system that will identify a new trading opportunity at its earliest stage.
Moving Average Crossover Method - Trading Strategy
Sell signal and Buy signal Generated by MA Cross-over Method - Trading Strategy
3. Choose additional indicators to confirm the market trend
Once we find 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 a trader from fake-outs.
To confirm the signals we use RSI & Stochastic Oscillator Indicator.
RSI & Stochastic Oscillator Indicator Trading System
4. Finding entry & exit points
Once the indicators are chosen so that one indicator gives the signal & another confirms the signal, it is time to enter a trade.
A Stock Index trader should enter as soon as a signal is generated and confirmed after a candlestick closes.
Aggressive traders enter a Stock Index 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 hasn't changed and the signal remains valid. This method is more considerate and prevents additional false entries and whipsaws.
Generating Signals - Trading Index Strategy
Generating Signals - Trading Stock Index Strategy
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 specific time. Alternatively one can exit the trade when the indicators give an opposite signal.
When opening a new Index trade transaction it's 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 Stock Index you must calculate your risk for each trade. Serious stock 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:
Money Management Reward Risk Chart - Trading Strategy
In the first example of Risk to Reward Ratio, you can see that even if the Stock Index system only won 50% of your trades, you would still make a profit of $10,000 as shown on the example above. Read more on this lesson: 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 Stock Index trade transaction.
6. Write down the Stock Indices systems trading rules and 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 trading strategy in the first place.
The next trading systems lesson shows you an example of how to use the above steps to create your own Stock Indices online system:
Next Lesson: Example of Writing Trade Systems Rules
7. Practice Stock Indices on a Practice Account
Without enough trades, you will not be able to realize the true profitability of your system.
Once you as a trader have your system rules written, it is time to test & improve your trade system by using it on a practice trading account.
Open a free demo practice account & trade your system 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 as to gain some practice and experience how the market works.
Once you begin making some a profit on your demo trading account you can then try opening a live account & start trading online stock index.
