MetaStock Trading System

Getting to know indicators and price patterns is the next step in designing trading strategy after making decisions on type of market and time frame to trade.

Indicators

Indicators are the backbone of the strategy. Most Trading Software, such as MetaStock or TradeStation, have included indicators library. Many of the standard indicators are found in their library. They also allow traders to adjust, optimize and create their own indicators as well.

You may notice that most indicators (if not all) are price based. By saying price based, it means most indicators are calculated by using some number from a price bar; the open, high, low, close. Therefore it may look very similar on the same chart.

One thing you should understand is that most indicators that are based on the same prices, e.g. the close, look about the same. Many new traders try to combine indicators that are based on the same data. This leads to unnecessary redundancy and duplication.

So, if you you want to combine and use multiple indicators in your strategy, try to combine indicators that are based on different prices. For example, you might combine an indicator based on the close with an indicator based on volume, or with one based on volatility.

Since almost any price activity can ultimately be made into an indicator. So, if you want to create your own indicator, all you need to is just to draw a line with quantifiable data and name it.

Price Patterns

In addition to indicators, there is a type of trading method that is commonly used among traders. It is price patterns. The concept of this method is that you identify specific price patterns and trade them.

For example, let’s consider a simple and easy pattern to understand, the consecutive closes. Trading this pattern maybe just buying the market after three consecutive up closes and sell after three consecutive down closes. Although it is a simple price pattern, you can make them as complex as your imagination allows.

For example, you may formulate a buy signal after the price forms up-down-up pattern, which is; today’s close price higher than yesterday’s close price, yesterday’s close price lower than the close price of the day before, and that close is greater than the previous close. In vice versa, you may formulate a sell signal after the price forms down-up-down, which is; today’s close price lower than yesterday’s close price, yesterday’s close price higher than the close price of the day before, and that close is less than the previous close.