Creating a Trading System: Indicator Based System

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

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

• RSI
• MACD
• MAs Trading Technical Indicator

Example

Creating a Indices System - Trading System Example Template

So the question is how can a trader come up with a systems that works & how does one write its rules? Follow the steps below:

Seven steps to creating an indicator based system

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

1. Choose your Indices Trading Timeframe

This first step depends on how many hours you want to dedicate to indices trading. Whether you prefer sitting in front of the Desktop computer constantly for several hours analyzing short Indices Trading time frames OR you prefer setting up your charts using bigger Indices Trading time frames once or twice a day. Choosing a charts time frame will mainly depend on what type of trader you are.

Chart Time Frames on MT4 - MetaTrader 4 Software

While testing your new system you may want to find out about its performance on different Indices Trading chart timeframes and then choose the most accurate & profitable Indices Trading chart time frame for you.

2. Select indicators to identify a new trend

The goal of a trader is to get into the trade as early as possible and 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 strategy is to use a MA cross-over system that will identify a new stock indices setup opportunity at its earliest stage.

MA Crossover Strategy - System

Indices Sell signal & Indices Buy signal Generated by Moving Average Crossover Technique

3. Select additional indicators to confirm the Indices Trading market trend

Once we find a new trend we need to use additional indicators that will confirm the Indices Trading entry signals & give either a green light for action or save a trader from fake outs and whipsaws.

To confirm the signals we use RSI and Stochastic Oscillator.

RSI & Stochastic Oscillator Indicator System

4. Finding entry and exit points

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

A trader should enter as soon as a signal is generated and confirmed after a candlestick closes.

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

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

Generating Trading Signals

Generating Indices Trade Signals

For exits, one can either set an amount he wants to earn per trade or use technical tools that help to set profit goals like Fibonacci Expansion Indicator or set a protective stop loss depending on the Indices Trading market volatility at any given time. Alternatively one can exit when the indicators give an opposite signal.

When opening a new trade transaction it's always important to calculate in advance how much you're willing to lose if the Indices Trading transaction goes against you. Although the goal is to create the best indices system in the globe, losses are inevitable & therefore being ready to tell where you'll give up & cut your losses before beginning a trade is very important.

5. Calculate risks in each trade setup

In Trading you must calculate your risk for each trade. Serious 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 greatly increase your chances of becoming profitable when trading Indices Trading in the long run.

The Risk to Reward Chart below shows you how:

Indices Money Management Reward Risk Chart - Indices Trading

In the first examples of Risk to Reward Ratio, you can see that even if your trading system only won 50% of your open trades, you would still make profit of $10,000. Interpret more on this course: Here Indices Money Management Guidelines and Indices Money Management Methods.

Before opening a new trade, a trader should define the point at which he will close the open trade if it turns to be a losing one. Some traders use Stock Indices Fibonacci Retracement Levels and support & resistance areas. Others just use a pre-determined stop loss to set stop loss order once they have opened a trade transaction.

6. Write down the systems indices rules & follow them

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

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

The next systems guide shows you an example of how to use above steps to come up with your own Indices Trading online system:

Next Guide: Example of Writing Trading Systems Rules

7. Practice on a Demo Account

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

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

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

It is strongly recommended to begin with a practice account and 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 Indices demo account you can then try opening a live account and start indices trading with real money.