Developing Stock Indices Trading System: Trading Indicator Stock Indices System

A Stock Index System refers to a set of stock index trading rules that you follow to manage your stock trades. These trading rules will determine when you open a stock trade and when you'll exit the open trade. A trade Stock Indices trading system is created by combining two or more technical indicators.

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

• RSI
• MACD
• Moving Averages

Example of Stock Index trading system

Developing Stock Indices System - Stock Index System Trading Example

So the question is how can one come up with a Stock Indices 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 Stock Indices trading system

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

1. Choose your Chart Time Frame

This first step depends on how many hours you 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 Indices trading charts using bigger time-frames once or twice a day. Choosing a Stock Indices trading chart time frame will mainly depend on what type of Stock Index trader you are.

While testing your new Stock Index trading system you may want to find out about its performance on different chart time frames and then choose the most accurate and profitable Stock Indices trading 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 and 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 Stock Indices strategy is to use a moving average Stock Indices crossover system that will identify a new trading opportunity at its earliest stage.

Moving Average Crossover Method - Stock Indices Trading Strategy

Sell signal and Buy signal Generated by MA Moving Average Crossover Method - Stock Indices Trading Strategy

3. Choose additional Stock Indices indicators to confirm the trend

Once we find a new trend on the Stock Indices trading 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 Stock Indices trading signals we use RSI & Stochastic Oscillator.

RSI & Stochastic Oscillator Technical Indicator Indices Trading System

4. Finding entry & exit points

Once the Stock Indices indicators are chosen so that one indicator gives the signal and another confirms the Stock Indices trading 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 Indices 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 Stock Indices trade setup has not changed and the signal remains valid. This method is more considerate and prevents additional false entries and whipsaws.

Generating Stock Index Trading Signals - Trading Stock Index Strategy

Generating Stock Index Trading 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 given time. Alternatively one can exit the Stock Indices trade when the indicators give an opposite signal.

When opening a new Stock Index trade transaction it's always important to calculate in advance how much you are willing to lose if the indices transaction goes against you.

5. Calculate risks in each setup

In Stock Indices you must calculate your risk for each Stock Index trade. Serious Stock Indices traders will only enter look to open an order it the risk to reward ratio is 2:1 or more.

If you use a high risk to 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 - Stock Indices Trading Strategy

In the first example of Risk to Reward Ratio, you can see that even if your Stock Index trading system only won 50% of your Indices trades, you would still make a profit of $10,000 as shown on the example above. Read more on this topic: Money Management Rules and 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 & resistance levels. Others just use a pre-determined stop loss to set stop loss order once they have opened a Stock Indices trade transaction.

6. Write down the Stock Indices systems trading rules and follow them

A Stock Index 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 trading rules then you don't even have a Stock Indices trading system in the first place.

The next Stock Index trading systems lesson shows you an example of how to use the above steps to come up with your own Stock Indices online trading system:

Next Lesson: Example of Writing Stock Index Trade Systems Rules

7. Practice Stock Indices Trading on a Demo Account

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

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

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

It is strongly recommended to begin with a demo account & practice Stock Indices trading for at least for 1 or 2 months so as to gain some practice and experience how the Stock Indices market works.

Once you begin making some a profit on your Indices demo trading account you can then try opening a live Stock Indices trading account & start trading online stock index.