Information To Know Concerning A Mechanical Trading System

By Tom Kearney

Investors want to get the most return for their investment dollars with the least amount of risk. In order to make decisions that will maximize profits, investors often need to be able to make decisions based on facts and not emotions. A mechanical trading system allows the investor to make the decision with as few emotions as possible.

Using the system correctly will exclude all the undue influences of emotions from your investments. By allowing emotions to enter the formula, many investors have lost great profits over time. They will sell when they should be holding and hold when they should be selling simply due to an emotional response to the market.

Of all the influences on trading, human emotion may be the most complex. In addition, emotion is one of the most difficult areas to control. To be successful in the market, the investor must control emotions first. This will entail following your system against your gut instinct at times. When every one else is selling, you will need to hold on and when they are buying, you may need to sell, but the system will determine this and let you know what to do.

The mechanical system gives investors very distinct rules that instruct the trader what he should do in response to each turn of the market. He will know the move as well as when to make the move. The signals will be given as to the correct time to enter into a trade and when to exit out of it.

The best mechanical systems define their rules from past market performances to predict the future performance. Once the system is created, it will be back tested. This involves seeing if the system would have worked under several conditions in past markets as an indicator as to whether it will work in most other market situations.

There are never any guarantees with the market, but backtesting is one way to see if a system is sustainable. This helps to gain confidence of investors that the system will turn a profit and work in most market situations.

The mechanical system will generate signals and calculate risks without considering the input of emotions. These investments are sometimes difficult because of the power of emotions in our lives.

There are risks to any investment scheme, including mechanical trading. While the backtesting that is done to prove the system is one of the best ways to show the reliability of the system, there are still risks. Investors should weigh these risks before making any investments.

Even if you find the best of mechanical systems, it is difficult to overcome the role of emotions and to keep them from taking control of investments. If there is a small failure of your system, you need to remember to continue following it in order to regain the losses.

There are many advantages to using this type of system in deciding which purchases to make, but the greatest benefit of a mechanical trading system is that it takes all of the emotions that may be destructive out of the way of the success of the trader. - 32373

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The Secret Of Trading Systems For Winning Trading Results.

By Tom Kearney

If you are new to trading, you might have heard experienced traders talk about trading systems. What are these? How can they help you to be a better trader?

A trading system comprises of a set of rules that manage your trading activities. Although there are many books and courses about the subject, in the end you are the only one that can draw up the best trading system for yourself. You can read the books, but then you have to take into account your own situation when drawing up your final trading system.

Before even starting to trade with real money, you should first open a demo account at any of the many online brokers offering this facility. Here you can trade to your heart's content with virtual money You can test all your trading strategies and see how they would work under real life conditions.

During the period that you are trading on the demo account, you should already get your trading system in place. Set up all the trading rules and modify them if they don't work in actual trading situations.

Your chosen trading system should not disregard your financial realities. If you are lucky enough to have a million dollars in your account, you can certainly afford larger trades than someone with five hundred dollars in his account. The important thing is that your trading system should unambiguously stipulate how much you are permitted to risk on any single trade. As a rule of thumb this should not be more than between 1 and 5 percent of your trading account.

You should also decide which market you will be trading: stocks, commodities or foreign exchange (forex). Choose one and stick to it. Don't try to be a master of all markets.

Most novice traders think the difficult part is to decide when to enter a trade. Not so. The difficult part is knowing when to let go of a trade. If your trading strategy involves buying when the price moves above the moving average, you can make money regularly if you exit the trade at the right time. If you find yourself unable to let go of losing trades, you are in for a big loss sooner or later. That's why it's important that your trading system should set out under which circumstances you should exit any trade.

You should also clearly state in your trading system what the reward/risk ratio of any trade should be before you enter into it. If you risk a thousand dollars with a trade, but there is reasonable expectation that you can make a million dollars, it's of course a good trade. If a winning trade will only bring you 500 dollars, how you can justify risking a thousand dollars on such a trade?

There are numerous software packages on the market that allow you to back test your trading systems. This means you can import actual historical data and see how your system would have done under those conditions. Never see this as the alpha and omega of trading: it will give you a good indication whether your system can work under real-life circumstances, but it can never guarantee that things will work out exactly the same way in the future. - 32373

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Stock Market Timing Strategies Or Buy And Hold: Which Is Best

By Tom Kearney

Stock market timing strategies can be long or short term. The strategies are different for single stocks than they are for mutual funds, of course. With single stocks you base your strategy on your knowledge of an individual company. What are the fundamentals of the company; earnings, sales, assets, technology and management. The context of the over all market for the service or product that the company produces is also relevant to knowing when to buy and when to sell.

It is simple to see the point of stock market timing strategies. As Warren Buffet will tell you over and over again, all you need to do is buy low and sell high. The tough part, of course knowing when. It is not possible to always be right, but it is possible to be right enough often enough to stay in the game.

In opposition to stock market timing strategies is buy and hold. The thinking behind buy and hold is that overtime, stock markets will rise. If one can weather out blips and bubbles, one will make money in the market. That is fine as far as it goes, but even in a traditional investment scheme, one has to be able to recognize when one is sitting on a bubble. The 2000 to 2001 collapse of the tech sector demonstrated this to many. More recently, the housing bubble crushed many. In short, if it looks like a bubble, buy and hold is not successful.

That is not to say that a stock market timing strategy isn't without its own risks. In general, stock market timing strategies are best used in speculative small cap ventures. And even then, you only get in the game when a stock is rising. This is counter to buy low element.

To illustrate, let us take the example of mining stocks. Small mining companies are available at pennies per stock. If a company hits a good find, the stock will increase in value for up to a week. Getting in and out early pays big, safe dividends.

But keep in mind that these types of investments are almost total losses if the only thing drive the valuation upward is air. For this reason, you should only risk this type of in and out when a change in a company's fundamentals is shaping up. For a wireless technology company this could be something as simple as the adoption of an industry standard that is compatible with the company's technology.

Regarding mutual funds: buy and hold with an eye on sector economics is the best way to go. Do not, however, allow yourself to become complacent. Mutual fund holdings must be monitored every month. Too many investor go into denial when a sector falters and tell themselves what they are doing is buy and hold, when what they are really doing is sticking their head in the sand. It is just human nature to avoid bad news.

The debate comparing stock market timing strategies as opposed to buy and hold strategies will never be finalized as context is key to which scheme will give the best return. It is the wise investor who does not allow the market to pass them by. This is the benefit of using stock market timing strategies. - 32373

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