Creating a Stock System: Technical Indicator Based Stocks System

A Stocks System refers to a set of stocks rules that you follow to manage your trades. These written stocks rules will determine when you open a stocks trade and when you will exit. A stocks 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 stocks system. For this example - stochastic oscillator can be combined with the technical indicators below to come up with the following  stocks system.

• RSI indicator
• MACD indicator
• Moving Averages indicators

Example - MT4 Template Stocks System Example

Creating a Stocks System - Stocks System Trading Example

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

Seven steps to creating an technical indicator based trading system

To come up with these set of stocks 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 stocks. Whether you prefer sitting in front of the computer constantly for several hours analyzing short stocks chart timeframes OR you prefer setting up your stocks 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 in MT4 Software

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

2. Choose indicators to identify a new stocks trend

The goal of a trader is to get into the trade as early as possible and take maximum advantage of stocks price moves.

One of the common ways to spot a new stocks trend as fast as possible is to use Moving Averages Indicator. A simple strategy is to use a moving average crossover system that will identify a new trading opportunity at its earliest stage.

Moving Average Crossover Method

Sell stocks signal & Buy stocks signal Generated by Moving Average Crossover Stocks Method

3. Choose additional indicators to confirm the stocks trend

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

To confirm the stocks signals we use RSI indicator & Stochastic Oscillator indicator.

RSI Stock Indicator & Stochastic Oscillator Indicator Stocks System

4. Finding entry and exit points

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

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

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

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

Generating Stocks Signals - how to Generate Stocks 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 stocks 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 are willing to lose if the trade goes against you. Although the goal is to create the best stock trading system in world, losses are inevitable and therefore being ready to tell where you will give up and cut your losses before starting a stocks trade is very important.

5. Calculate risks in each Stocks trade setup

In Stocks, you must calculate your risk for each trade. Serious traders will only enter and 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 to Reward Chart below shows you how:

Stock Money Management Reward Risk Chart - Example Template Stocks System

In the first example of Risk to Reward Ratio, you can see that even if your stocks system only won 50% of your trades, you would still make profit of $10,000. Read more on this stocks money management stocks topic: Here Money Management Rules - MT4 Template Stocks System and Stock Money Management Methods - Template Stocks System Example.

Before opening a new stocks trade, a trader should define the point at which they will close the stocks trade if it turns to be a losing stocks 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 stocks trade transaction.

6. Write down the stocks systems stocks rules and follow them

A Stocks 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 stocks rules then you don't even have a stocks system in the first place.

The next stock trading systems lesson shows you an example of how to use the above steps to come up with your own Stocks Trading online stocks system:

Next Lesson: Examples of Writing Stocks 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 stock trading system rules written, it is time to test and improve your trade system by using it on a practice account.

Open a free demo trading account and trade your stocks system to see how well it will respond.

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

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