by Dennis D. Peterson
Copyright (c) Technical Analysis Inc.
There are three key features when it comes to developing a trading system : entry and exit signals, a plan for the type of stop, and a money management strategy. The first involves generating the signals, which can be purely visual, a result of technical indicators , or a combination of both. Most mechanical trading systems use indicators to encode visual signals. In this article I will take two of the better-known technical indicators and go through the steps involved in developing a trading system.
The two indicators I will be using are Bollinger Bands and stochastic relative strength index (StochRSI). StochRSI, which combines the features of stochastics and RSI , was detailed in Tushar S. Chande and Stanley Kroll’s book, The New Technical Trader. I selected this combination because it is a useful way to determine when prices will stop tagging a Bollinger Band and are likely to move all the way from one band to the next.
Of course, those prices may not move all the way, so you will need to use stops for protection. You will also want to use a simple money management strategy of allocating only a portion of your capital to any one position.