How to Build your Own Trading Indicator

Trading Background

Recall the theory behind stock market hypothesis. According to the theory, the charts display elements of psychology that can be interpreted via technical indicators.

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The indicators are designed to predict the price headings when a certain condition is present. The trader tries to predict two major effects: support and resistance levels, and time.

The support and resistance levels are important, as they are the attributes which reverse price direction. These are the static barriers that help to sustain or repel the movement of stock markets.

The time on the other hand is important as it is used to predict when the price movement will occur.

Indicator Components

The indicators encompass the aspects of charts and mathematical functions. The two most important components are described below:

• Patterns: these are essentially repetitive price sequences apparent over the course of a particular time period. Indicators use patterns to figure out the price movements. For example, Elliott wave theory is based on the premise that all price structures move in a certain pattern. The traders use these patterns to study the price movement within cycles. Some of the pattern included triangles, wedges and rectangles.
• Mathematical Functions: these functions can range from price averaging to the more complex functions based on the volume and other measures. For example, Bollinger Bands are simply fixed percentages above and below a moving average. This mathematical function gives a clear idea regarding the price channel. This also show support and resistance levels.

An indicator can be created by a trader by following several steps:

• Determine the type of indicator you wish to build: Unique or Hybrid.
• Determine the components to be integrated in your indicator.
• Create a set of rules to watch over the price movements.
• Test your indicator in the real market through back testing or mock trading.

This has been shown with the help of an example.

Over here, we are trying to create an indicator that measures one of the most basic elements of the market- the price swings. The main aim of our indicator is to predict future price movements. The following steps are used-

Step 1: we look forward to develop an indicator using two core elements i.e.  pattern and mathematic function.

Step 2: we look at the market swing and study it meticulously. Then we implement the swing math function into the indicator. Price averages are also kept an eye on to identify the swings.

Step 3: we need to define various rules that will preside over these elements. Out of the two, the patterns are the easiest to define.

Step 4: then, we test the indicator manually or using a software program. We can observe the working of the indicator with the real-time market movement.

Step 5: once the observations are successful, we can use this indicator in the practical market condition to win the game.

Conclusion

Eventually, building your own indicator is always profitable. Your aim is always to get an edge off other traders.  You should always try to use the basic concepts to build a unique product. They are long lasting, steadfast and secure.

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