Creating a Commodities Trading System: Indicator Based Commodities Trading System

A Commodity Trading System refers to a set of commodity rules that you follow to manage your trades. These written commodity rules will determine when you open a trade and when you'll exit. A trade system is created by combining 2 or more technical indicators.

For example, the Stochastic Oscillator technical indicator can be combined with other indicators to form a commodity system. For this example - stochastic oscillator can be combined with the 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 Commodity System - Commodity System Template Examples

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

Seven steps to creating an technical indicator based trading system

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

1. Choose your Trading Chart Time Frame

This first step depends on how many hours you want to dedicate to commodity. Whether you prefer sitting in front of the computer constantly for several hours analyzing short commodity chart time frames OR you prefer setting up your commodity charts using bigger chart time frames once or twice a day. Choosing a chart time frame will mainly depend on what type of trader you are.

Trading Chart Time Frames in MetaTrader 4 Platform

While testing your new trading system you may want to find out about its performance on different chart time frames and then choose the most accurate and profitable 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 identify a new trend as fast as possible is to use MAs Indicator. A simple strategy is to use a moving average cross-over system that will identify a new trading opportunity at its earliest stage.

MA Crossover Technique

Sell commodity signal and Buy signal Generated by MA Cross Over Commodity Trading Method

3. Choose additional indicators to confirm the commodity trend

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

To confirm the commodity signals we use RSI indicator and Stochastic Oscillator indicator.

RSI Commodity Technical Indicator and Stochastic Oscillator Technical Indicator Trading 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's time to enter a trade transaction.

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

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

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

Generating Signals - how to Generate Trading Signals.

Generating Trade Signals

For exits, a trader can either set an amount the 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 commodity 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 trading system in the world, losses are inevitable & therefore being ready to tell where you will give up & cut your losses before beginning a trade is very important.

5. Calculate risks in each commodity trade setup

In Commodities, you must calculate your risk for each trade. Serious traders will only enter and look to open an order if the risk to reward is 2:1 or more.

If you use a high risk : reward ratio like 2:1, you significantly increase your chances of becoming profitable in the long run.

The Risk-Reward Chart below highlights you how:

Commodities Money Management Reward Risk Chart - Example Template Trading System

In the first example of Risk-:-Reward Ratio, you can see that even if your commodity system only won 50% of your trades, you would still make a profit of $10,000. Interpret more on this commodity money management commodity topic: Here Commodities Trading Money Management Rules - MT4 Template Trading System and Commodities Money Management Techniques - Template Trading System Example.

Before opening a new trade, a trader should define the point at which they will close the commodity trade if it turns to be a losing trade. Some traders use Fibonacci retracement levels tool and support & resistance areas. Other traders just use a pre-determined stop loss to set stop loss orders once they have opened a trade transaction.

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

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

The next trading systems lesson displays to you an example of how to utilize the above steps to come up with your own Commodity Trading online commodity system:

Next Guide: Examples of Writing Commodities Trade Systems Rules

7. Practice on a Demo Account

Without enough trades, you won't be able to realize the true profitability of your trading system.

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

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

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

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