Creating a Stock Indices Trading System: Technical Indicator Based Stock Indices Trading System
A Indices System refers to a set of trading rules that you follow to manage your trades. These written indices trading rules will determine when you open a indices trade & when you'll exit. A indices trade system is created by combining two or more technical indicators.
For example, the Stochastic Oscillator technical indicator can be combined with other indicators to form a trading system. For this example - stochastic oscillator can be combined with the technical indicators below to come up with the following trading system.
- RSI indicator
- MACD indicator
- Moving Averages indicators
Examples - MT4 Template Trading System Example
Creating a Indices System - Indices Trading System Trading Example Template
So the question is how can a trader come up with indices trading systems that work like the stock indices trading system example above and how does one write it's trading rules? to write the indices trading system rules follow the steps below.
Seven steps to creating an technical indicator based trading system
To come up with these set of trading rules we use the following seven steps.
1. Choose your Chart 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 interpreting short indices chart timeframes OR you prefer setting up your indices charts using bigger chart timeframes once or twice a day. Choosing a chart timeframe will mainly depend on what type of trader you are.
Chart Time Frames on MT4 Software
While testing your new indices trading system you may want to find out about its performance on different chart timeframes and then choose the most accurate & profitable chart timeframe for you.
2. Choose indicators to identify a new indices trend
The goal of a trader is to get into the trade as early as possible and take maximum advantage of stock indices trading price moves.
One of the common ways to spot a new indices trend as fast as possible is to use Moving Averages Indicator. A simple indices trading strategy is to use a moving average crossover system that will identify a new trading opportunity at its earliest stage.
Moving Average Crossover Technique
Sell stock indices signal and Buy stock indices signal Generated by Moving Average Crossover Indices Trading Method
3. Choose additional indicators to confirm the indices trend
Once we find a new indices trend we need to use additional indicators that will confirm the entry stock indices signals & give either a green light for action or save a trader from fake outs.
To confirm the indices trading signals we use RSI indicator & Stochastic Oscillator indicator.
RSI Stock Indices Indicator and Stochastic Oscillator Indicator Trading System
4. Finding indices entry and indices trading exit points
Once technical indicators are chosen so that one indicator gives the signal & another indicator confirms the signal, it's time to enter a indices trade.
A trader should enter a indices trade as soon as a stock indices signal is generated and confirmed after a candlestick closes.
Aggressive traders enter a trade transaction immediately without waiting for the current stock indices trading price bar to close.
Other traders wait until the current stock indices trading price bar is closed and then enter the trade transaction if the trade setup has not changed and the stock indices signal remains valid. This method is more considerate and prevents additional false entries and indices trading whipsaws.
Generating Indices Trading Signals - how to Generate Trading Signals.
Generating Trade Signals
For exits, a trader can either set an amount that wants to earn per trade or use technical indices trading tools that help to set profit goals like Fibonacci expansion tool or set a protective stop loss depending on the indices market volatility at any given time. Alternatively a trader can exit when the indicators give an opposite trading 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 goal is to create the best indices system in world, losses are inevitable & therefore being ready to tell where you will give up & cut your losses before starting a indices trade is very important.
5. Calculate risks in each Stock Indices trade setup
In Indices, you must calculate your risk for each trade. Serious traders will only enter & look to open an order if the risk to reward ratio is 2:1 or more.
If you use a high risk to reward ratio like 2:1, you significantly increase your chances of becoming profitable in the long run.
The Risk-Reward Chart below shows you how:
Indices Money Management Reward Risk Chart - Example Template Trading 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 indices trading money management indices trading topic: Here Indices Trading Money Management Guidelines - MT4 Template Trading System and Indices Money Management Techniques - Template Trading System Example.
Before opening a new indices trade, a trader should define the point at which they will close the indices trade if it turns to be a losing indices trade. Some traders use Fibonacci retracement levels tool and support and resistance levels. Other traders just use a pre-determined stop loss to set stop loss orders once they have opened a indices trade transaction.
6. Write down the systems indices rules & follow them
A Indices 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 do not follow the indices rules then you don't even have a indices trading system in the first place.
The next indices trading systems guide shows you an example of how to use above steps to come up with your own Indices online indices trading system:
Next Guide: Examples of Writing Indices Trade Systems Rules
7. Practice on a Practice Account
Without enough trades, you will not be able to realize the true profitability of your trading system.
Once you have your indices trading system rules written, it is time to test & improve your trade system by using it on a practice account.
Open a free practice trading account & trade your indices trading system to see how well it will respond.
It is strongly recommended to begin with a practice stock indices trading account & practice for at least for 1 or 2 months so as to gain some practice & experience how the stock indices trading market works.
Once you start making some decent profit on your demo stock indices trading account you can then try opening a live stock indices account & start trading with real money.
