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How To Design A Trading System Using Technical AnalysisBooks and courses often just give you the textbook classic uses of technical indicators.  With a library of indicators in our trading platform we can easily just drag the indicator onto a chart and try to visually find a way to use it.  For the back testers amongst us it’s too easy to just throw an indicator into the mix without fully thinking about what purpose it really serves and what it means.

I want to challenge you to think and use technical indicators in unconventional ways that make logical sense.

Trading systems should be built from the ground up.

What market state(s) are you developing a system for?

Is it Trending Volatile, Trending Quiet, Ranging Volatile and/or Ranging Quiet?

From the market states we can derive that there are 3 main categories: Trend, Range and Volatile.

These three categories are the foundation principles we should use to build up a system.

What does a trend, range and volatility look like and how will we recognise it?

Trend: price must break out as it goes somewhere.  The classic definition is higher highs and higher lows in an uptrend and lower highs and lower lows in a downtrend.

Range: price stays within an existing area.  It looks like equal or lower highs paired with equal or higher lows.

Volatility: this is the measure of how forceful price moves.  This could be movement to a new destination, a seismic earthquake looking effect on a chart going nowhere or it may be meandering quietly somewhere new or nowhere.

Different timeframes may be experiencing trends, ranges or volatility at different times.

All technical indicators are derived from mathematical formulas.

Consider a technical indicator for a moment.  It’s so easy to put it on a chart and hope to use it.  But all technical indicators are actually mathematical formulas.

Get down to the mathematics of the equation that creates the indicator and seek to fully understand it.  Think, what does this technical indicator tell me about the trend, range or volatility of the price?

Are you doubling up?

Are you using more than one technical indicator that tells you the same thing, just in a different way?  Consider whether you can lose one.  Is it time for some redundancies?

Remember the principle “LESS IS MORE”.

Only use a few technical indicators but seek to really understand them.  What do they mean?  What do they say about the trend, range, volatility and current price?

If you start the process with the market state in mind you will know what market state your system is designed for.  Then it’s up to you to recognise what state you’re in.

Begin with the end in mind!

 

Video Of My Educational Presentation: How To Design A Trading System Using Technical Analysis

I recently presented a short educational segment on this topic.  Here’s my presentation.

 

Infographic: The Intersection of Technical Indicators and Market States for Trading Financial Markets

Intersection Of Technical Indicators And Market States

 

Let’s get thinking

  • Do you consider market states when designing trading systems?
  • What technical indicators do you use and what do they tell you about the market?
  • What market state(s) do you trade?

Please leave a comment below and click the like/share buttons

About Rachel Hunter TraderRachAbout the Author: I’m Rachel Hunter, TraderRach, a Forex Trader who helps traders achieve the life they love with forex.  Be strategic and design your trading business for sustainable success and have fun!  That’s my mission.  Join many traders’ gaining the edge with “10 Powerful Lessons for Forex Trading Success” plus other goodies.  Years of precious learning specially packaged up for you.  My background before trading is as a Chartered Accountant and Chief Financial Officer.   I know what it takes to make a trading business rock on.  It would give me great pleasure to make a difference to your success.

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5 Responses so far.


  1. Derek Britten says:

    Thanks for this Rach – I completely agree with understanding how indicators are calculated and the need to use those we fully understand and can interpret well.

  2. Thank you for this lesson. I can use this in Traffic and other systems!

  3. Dion V says:

    Great article and good information, thanks for sharing!

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