Creating a System: Indicator Based Stock System

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

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

• RSI indicator
• MACD indicator
• MAs indicators

Examples - MT4 Template System Example

Creating a System - Trading System Example Template

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

Seven steps to creating an indicator based system

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

1. Choose 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 timeframes OR you prefer setting up your charts using bigger chart timeframes once or twice a day. Choosing a chart timeframe will mainly depend on what type of trader you are.

Time Frames on MetaTrader 4 Software

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 & profitable chart timeframe 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 identify a new trend as fast as possible is to use MAs Indicator. A simple trading strategy is to use a MA cross-over system that will identify a new trading opportunity at its earliest stage.

MA Crossover Technique

Sell signal and Buy signal Generated by Moving Average Cross Over Indices Trading Method

3. Select additional indicators to confirm the trend

Once we find a new trend we need to use additional 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 indicator & Stochastic Oscillator indicator.

RSI Indicator and Stochastic Indicator System

4. Finding indices entry and exit points

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

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

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

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

Generating Trading Signals - how to Generate Signals.

Generating Trade 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 Fibonacci expansion tool or set a protective stop loss depending on the market volatility at any specific time. Alternatively a trader can exit when the indicators give an opposite signal.

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

In Indices, you must calculate your risk for each trade. Serious traders will only enter & 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 increase your chances of becoming profitable in the long run.

The Risk-Reward Chart below portrays you how:

Indices Money Management Reward Risk Chart - Example Template System

In the first examples of Risk-:-Reward Ratio, you can see that even if your trading system only won 50% of your trades, you would still make profit of $10,000. Read more on this money management indices topic: Here Indices Money Management Guidelines - MT4 Template Trading System and Indices Equity Management Techniques - Template System Example.

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

6. Write down the systems indices rules & follow them

A Trade System refers to a set of 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 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 Guide: Examples of Writing Trade Systems Rules

7. Practice on a Practice Account

Without enough trade transactions, 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 is time to test & improve your trade system by using it on a practice account.

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

It's strongly recommended to begin with a practice account & practice for at least for 1 or 2 months so as to gain some practice & experience how the market works.

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