How to Generate Trading Signals with a Strategy
How Do You Trade Indices and Generate Indices Trading Signals with a Indices Trading Strategy?
This indices trading guide will show an example of a Best Indices Trading Strategy that swing traders can use to come up with a profitable Indices Best Indices Trading Strategy. Based on the popular stocks strategy, where stock investors use volumes to predict stock indices price direction, based on the concept "Volumes always precede indices price", in Indices market, there is no central clearing house where volumes are aggregated, so in we use an indicator that will estimate the volumes. This stock indices indicator is known as On Balance Volume.
This stock indices indicator is then combined with RSI and Moving Average Crossover Best Indices Strategy to form a Indices Best Indices Trading Strategy. Indicator settings are:
- 5 & 7 LWMA, Linear Weighted Moving Averages
- RSI 14
- OBV indices indicator
Time-frame: 4 Hour Chart
Entry Signal
Buy
- Both Moving Average pointing up
- RSI above 50
- OBV stock indices indicator is in an upwards indices trend line or it has broken downward indices trend line
Sell
- Both Moving Average pointing down
- RSI below 50
- OBV stock indices indicator is in a downward trend line or it has Broken upward Trend line
Exit Trading Signal
OBV stock indices indicator trend line is broken
RSI gives an opposite trading signal - 50 center mark cross-over
You can study more about writing a Best Indices Trading Strategy rules Writing Best Indices Trading Strategy Rules and Generating Indices Signals
You can also Read about other Indices Strategies: Strategies List
Example of Indices Trading generate Signals with This Best Strategy
Before looking at example below, using the 138 pips and 177 pips profit example, you need to learn the concept of volumes precedes stock indices price and On Balance Volume technical indicator.
The On Balance Volume trading indicator uses volumes to measure the money flowing into a indices instrument or money flowing out of a indices.
OBV stock indices indicator most popularly used for stocks analysis. The concept behind On Balance Volume is that Volume precedes stock indices price always and when it comes to analyzing the direction of a financial instrument whether or a indices instrument nothing is more crucial to this indices analysis as understanding the volumes that are flowing in and out of a indices. These volumes can be in terms of money, in Indices because charts moves in ticks data, the more money in a indices instrument the more the ticks data, therefore volumes in Indices will measure number of tick data participating in a indices.
On Balance Volume acts as a leading indicator giving a one an idea of how much buying pressure or selling pressure is moving into a indices. And because volumes precedes stock indices price then this can be used as a good trading indicator to explain the general investor sentiment.
For a Indices Best Indices Trading Strategy a one requires indicators are calculated differently. For examples our Best Indices Trading Strategy is based on
RSI - momentum indicator
MA - direction based indicator
OBV stock indices indicator - volume based technical indicator
A Best Indices Trading Strategy like this give a good overall picture of the stock indices trading market movement by taking into account 3 different calculation techniques as opposed to using 3 oscillators that give signals based on same calculation technique.
The OBV stock indices indicator will measure the tick volume of a indices instrument, for every candlestick. If you use the 1 hour chart timeframe, then the volumes will measure the total volume for the 1 hour. If you use day charts then the volume will measure the total volumes for the indices instrument for the whole day.
However, the volumes indicator does not show the direction of the volumes, only differentiating by colors for the different candlesticks, Green for Bullish Indices Candles & Red for Bearish Stock Indices Candles.
This is where the On Balance Volume comes in & adds a direction to the volumes & shows the overall direction that the volumes are flowing, whether into or out of a indices.
Volume Precedes Stock Indices Price
Volumes always precede indices price, this makes volumes a leading technical indicator. Knowing how to interpret this helps a trader make better decisions when it comes to predicting where the stock indices market direction is going to be moving to next.
When the volume rises it shows that money is starting to flow into a indices. Because volumes will precede the indices price, the next thing is that the value of a indices instrument will then go up. When the OBV stock indices indicator is going up it shows there are more buyers buying a indices instrument than the sellers selling it.
When the volume falls it shows that money is starting to flow out of a indices. Because volumes will precede the indices price, the next thing is that the value of a indices instrument will then go down. When the OBV stock indices indicator is going down it shows more trading volume is going short than long.
Subsequently when a downward indices trend line of the OBV stock indices indicator is broken it shows that sellers are starting to take profit and close their stock indices orders.
Likewise when the upwards trend line of the OBV stock indices indicator is broken it shows that the buyers are starting to close their buy stock indices trades & take their profits.
Because the On Balance Volume will add direction to the volume and form a general direction, a trader can compare the two, the stock indices price direction and the OBV stock indices indicator direction. The direction of these two should correspond but when there is a disconnect between these two then one should pay attention to know when to exit the stock indices trading market or when to open an order.
On Balance Volume is a leading indicator & a trader using this indicator can avoid entering a indices market when it is too late. This Indicator is also a good indicator to show when to take a profit early enough before the stock indices trading market takes away all your profit.
Indices Indicator Formation
The OBV stock indices indicator is the cumulative addition and subtraction of volume based on stock indices price direction.
Upward direction - adds volume/ technical indicator moves upward
Downwards direction - subtracts volume/ technical indicator moves upwards
Sideways market/Range market - technical indicator moves Sideways
Because stock indices price moves in a zigzag manner, the OBV stock indices indicator will also form in a zigzag manner
Indices Price Trend lines
Most Traders will use these to generate buy and sell stock indices signals.
For our Best Indices Trading Strategy we shall use the OBV stock indices indicator to confirm these buy sell signals from stock indices price trend lines.
We shall draw a Indices trend line on both the stock indices price and Indicator. If both give the same signal we buy or sell depending on direction.
This indices trading strategy will be used to figure out 2 things.
Continuation of the current market direction
Reversal of the current market direction
Example of this Strategy
1. Downward Bearish Market
In the above chart the first half of this indices instrument is bearish. This can be shown by the stock indices price trend line that shows a downward direction. This stock indices price downward trend line is also confirmed by the downward trend line on the indicator - as long as these two move in the same direction then the direction of the indices instrument remains decisively downwards.
Because volumes precede indices price, a trader can hold on to his sell stock indices trades because the stock indices trading market direction will not reverse, before OBV stock indices indicator gives a warning.
2. Indices Trend Change
Halfway through this chart there was a indices market reversal marked by the vertical line. This reversal stock indices signal was generated when there was a trend-line break as illustrated on the stock indices chart.
From the stock indices chart you can see that the OBV stock indices indicator gave the reversal stock indices signal just before the stock indices price trend line was broken generating a reversal indices signal. If you had opened a sell this is where you would have closed all your trades.
3. Upwards Bullish Market
Trading a indices market reversal can be sometimes tricky, but the reversal stock indices signal generated above was generated at the optimum time and stock indices price continued to move up after this reversal stock indices signal was generated.
For this you would have just bought the indices instrument when the two trend lines were broken to the up side giving a buy signal. This buy was also a good signal in that the On Balance Volume had already formed an upward indices trend line by the time the downward indices trend line was broken.
The new OBV stock indices indicator upward indices trend line confirmed the direction of the market as a buy and more indices traders will open buy indices orders and as long as it holds, as it did in the above example then the stock indices price will continue moving upwards.
After this stock indices signal was given you can see that later the stock indices price formed a decisive upward indices trend line that matched the OBV stock indices indicator upward indices trend line. As long as the two kept moving upwards then the stock indices trading market was firmly upwards.
Indices Trading Whipsaws
4. At the end of this upward direction, OBV stock indices indicator gave a indices whipsaw as if to break the upward trendline. However, even if you had opened a short trade because of this new signal that had formed as shown above you would have quickly closed your sell indices orders before they reversed because the OBV stock indices indicator soon broke this downward trend line as shown above and therefore the sell indices trade which was forming is now not valid.
One thing which a trader must learn to avoid as with any other indices trading strategy is that whipsaws might be generated. The best way to avoid this is to exit as soon as the OBV stock indices indicator trend line is broken especially when you are trading the reversal stock indices signals.
For the above example once you exit the short trade, after the new OBV stock indices indicator downward indices trend line was broken it shows there were still more buyers in this stock indices and it is better to exit any reversal trades that you might have opened, this is because the stock indices price might as will move further upwards as shown by the stock indices indicator moving upwards.
Because the OBV stock indices indicator still went up even after touching and breaching it a little, the OBV stock indices indicator upward indices trend line still held therefore the upwards bullish direction is still intact according to our indices technical analysis & any further trades here are still buy.
How to Generate Trading Signals with a Strategy
