NASDAQ Biotechnology Trading

A trading system could be defined as a set of rules that signal trading entry and exit points. In general trading system's rules are based on the various technical analysis indicators that generate feedback about the strength and direction of a trend. Trading systems may be developed to satisfy the specific needs of individual traders.

Building a trading system based on the NASDAQ Biotechnology Index

During the development of the trading system based on the technical analysis applied to the NASDAQ Biotechnology index the system developer must follow certain rules: the system has to generate trading signals, a certain procedure has to be defined that describes steps that have to be taken in order to make a trading decision based on the generated signals; stop-loss and risk management strategy has to be defined. Many of the trading system incorporate additional system that allows to autotrade generated signals by transforming the trading system into mechanical unemotional vehicle.

The building blocks of good index  are the accountable and historically tested technical indicators. Notwithstanding, even accomplished technical analysis indicators, can lose their accountability when associated in a trading system. That is why, it is of utmost importance to not only back-test your system, but to also forward-test it in real time.

Using a volume-based system to trade the NASDAQ Biotechnology Index as an example, the following simple rules could apply:

1. Analyze history and establish the volume (VMA) critical levels that precede index reversals in a majority of cases;
2. During a decline on the index, buy when the volume exceeds the critical level and then starts to move lower;
3. During an advance on the index, go short when the volume exceeds the critical level and then starts to move lower.

These rules are very basic; depending on the specific trading application, they may have to be adjusted.

The technical indicators that are to be incorporated into a trading system must first be well-researched and thoroughly tested. Several indicators may be combined into one system. The trading system then needs to undergo testing, adjusting, and fine-tuning. Only after completing such a comprehensive development process can a system trader realistically expect to auto-trade the signals generated by the NASDAQ Biotechnology Index trading system.

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