Developing a System: Indicator Based Stock System

A System refers to a set of trade rules which you follow to manage your trades. These written down rules will determine when you open a trade & when you'll exit. A system is developed by combining two or more indicators.

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

• RSI
• MACD indicator
• MAs indicators

Examples - MetaTrader 4 Template System Example

Making a System - Trading System Example Template

So the question is how can a trader come up with systems that work like the trading system example above and how does one writedown it's rules? to write the system rules follow the steps explained below.

Seven steps to developing a technical indicator based system

To come up with these set of trade rules we make use of the following 7 guidelines.

1. Choose and Select your Timeframe

This first step depends on the number of hours you as a trader want to set a side to trading. Whether you prefer sitting in front of the Desktop computer constantly for several hours interpreting short chart time frames OR you prefer setting up your charts using larger chart time frames once or twice a day. Choosing/Selecting a chart time frame will mainly depend on what type of trader you're.

Time Frames on MT4 Software Platform

While testing out your new trading system you might want to find out about its performance on different time frames & then select the most accurate and profitable chart time frame for you.

2. Choose technical 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 market trend as fast as possible is to use MAs Trading Indicator. A simple strategy is to use a MA cross over trading method which will identify a new opportunity at its earliest stage.

MA Cross over Method and Technique

Sell signal & Buy signal Derived/Generated by Moving Average Cross-Over Indices Trade Method

3. Select and Choose additional indicators to confirm the market trend

Once we find a new market trend we need to use additional 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 Technical indicator.

RSI Indicator and Stochastic Trading Indicator System

4. Finding indices entry and exit points

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

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

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

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

Generating Trade Signals - how to Generate Signals.

Generating Signals

For exits, a trader can either set an amount that wants to earn per trade or use technical tools that help to set profit goals like Fib expansion tool or set a protective stop loss order depending on the market price volatility at any specific time. Alternatively a trader can exit when the indicators give an in the opposite market trend signal.

When opening a new trade it's always important to calculate in advance how much you're willing to lose if the trade transaction moves against you. Although the objective is to develop the best system in world, losses are inevitable & therefore being ready to tell where you will give up & cut your losses before beginning a trade is very important.

5. Calculate risks in each setup

In Indices, you as a trader must calculate your risk for each trade. Serious traders will only enter and look to open an order if the risk : reward ratio is 2:1 or more.

If you use a high risk : reward ratio like 2:1, you significantly improve your chances of becoming profitable in the long run.

The Risk-Reward Chart below portrays you how:

Indices Money Management Risk:Reward Chart - Example Template System

In the first examples of Risk-:-Reward Ratio, you as a trader can see that even if your trade system only won 50% of your trades, you'd still make profit of $10,000. Read more on this money management indices topic: Here Indices Money Management Rules - MetaTrader 4 Template System and Index Equity Management Techniques - Template System Example.

Before and Prior to opening a new trade, a index trader should define the point at which they will close out the trade transaction if it turns out to be a losing trade. Some traders use Fib retracement levels tool and support & resistance areas. Other traders just use a pre-determined stop loss to set stop losses once they have opened a trade position.

6. Write down the systems indices rules and follow them

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

The keyword is A SET OF TRADING RULES which you as a trader must follow. If you don't follow the rules then you do not even have a trading system strategy in the first place.

The next trading systems guide shows you an example of how to use above steps to develop your own Indices online system:

Next Lesson: Example Illustrations of Writing Systems Rules

7. Practice on a Practice Account

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

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

Open a free practice account and trade your system to see how well it will respond.

It's strongly recommended to begin with a practice account and practice for at-least for one or two months so as to garner some practice & experience how the market works.

Once you start making some decent profit in your demo account you then can try opening a real account and start trading with real money.

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